29 Apr 1Q15 Earnings Season – Earnings vs. Revenues
TRADING EARNINGS SEASON 1Q15 GAME PLAN
- 40% or 200 S&P 500 companies have reported.
- The wide divergence between revenues and earnings remains.
- 70.5% of companies have reported positive earnings surprises of 4.7% (so not quite as high as last week).
- 44.5% of companies have reported positive revenue surprises.
- 59.5% reporting negative surprises have reported revenues -1.3% versus expectations (vs 1.2% last wk).
EARNINGS SEASON 1Q15 – EARNINGS VS. REVENUES
12% of the S&P 500 have reported earnings: the first item of note is the divergence between earnings surprises (73.3% positive surprises with an average surprise of +5.6%) and revenues, where negative surprises lead with 53.3% of the companies reporting lower revenues than expected. The average revenue “miss” was -1.2%.
The reasons for the differences between “top line” (revenues) and “bottom line” (earnings) are many and varied, all falling under the umbrella phrase “expenses”.
Specifically, in the case where revenues are less than expected and earnings are more than expected, expenses are lower. Which item(s) are causing the divergence? The most obvious guess would be oil (and refined products). But with only 12% of the index reporting, we’ll have to wait and see.
Bear in mind these numbers are RELATIVE TO EXPECTED results. As revenues show shortfalls, analysts rush to review their estimates for other companies and make changes where necessary.
EDUCATION CORNER: depending on the source from which you retrieve your company’s reports, you may be viewing a single-step or multiple-step income statement. To see the differences between the two, take a look at this link. It’s 2 pages and the professor made clear connections between the two examples.
WHAT LIES BENEATH: TAKE A LOOK AT THE SECTORS:
At the sector level, the consumer staples earnings surprises are, on average +13.1% with 100% of the companies that have reported showing positive surprises.
Energy companies have reported positive surprises of 11.3% on average but only 50% of the companies have reported positive surprises.
100% of healthcare companies in the S&P 500 have reported positive surprises of 3% on average. But only 3.6% of the sector has reported.
Energy led negative revenue surprises, with 100% of the companies reporting a -8% difference between expectations and actual. (4.9% of the index’s energy companies have reported).
Industrials have also wrong sided estimates with 87.5% of the companies reporting a difference in revenues of -7.4%. 16.7% of industrial companies in the index have reported.
Materials sector have reported negative earnings surprises averaging -3.7%. 13.8% of materials companies In the S&P 500 have reported.
TRADING EARNINGS – ONE APPROACH
Stock prices (as per those wonderful men and women who sift through the fine sand of statement notes and footnotes) generally like confluence between the surprises (positive surprises) in both earnings and revenues. But this is the first broad brush stroke of the earnings game. Many have published articles and white papers.
My preference for all things related to corporate finance is Aswath Damodaran. He wrote an excellent article “Earnings surprises, price reaction and value” which you can read here.
This piece is a bit different from his more quantitative work. This blog explains the Expectations Game, The Announcement Effect as well as the rules governing the companies and The Street’s analysts in plain, simple English. Then to assist you in formulating your earnings trading plan, he provides two key elements: 1) where the company is in its growth cycle, and the elements a trader should define and how the trader will respond to them and 2) which type of game plan fits you best, depending on the way you view equity values and valuation.
So check out Aswath’s approach. At the end of the blog, he offers the reader a challenge. Take the challenge and learn more about trading earnings seasons.
I’ll be back next week to see how y’all did.