Glossary of Earnings Season Terms
Analyst Expectations: This is one of the biggest market movers each and every earnings season—how a company performs versus analyst expectations. This won’t be in the official quarterly report from the company, but there are several places that take analyst predictions and average them together, including Bloomberg and Yahoo Finance.
A company can report a terrible quarter and institutional investors will cheer and bid up the stock, as long as it was a little less terrible than expected. Similarly, a company can report an exceptional quarter in real terms, but come in a few cents below expectations and be sold off sharply. Ultimately, this is a much bigger worry for short-term investors than it is for long-term investors, and sometimes provides exceptional buying or selling opportunities.
Earnings Surprise: Each quarter, Wall Street experts try to forecast a stock’s earnings per share. When they underestimate a stock, the company posts a positive “earnings surprise” that is calculated as a simple percentage. So if earnings for a given stock were forecast to be 10 cents a share and the company reports earnings of 20 cents a share, that is a 20% surprise—because 12cents is 20% larger than 10 cents. Positive earnings surprises show that a company exceeds expectations, and is doing better than investors predicted.
Earnings Disappointment: Similarly, if the company reported 8 cents a share on a forecast of 10 cents a share, it would be a negative surprise of 20%. A miss is more significant than a beat, considering that it’s often common for firms and analysts to lowball their estimates slightly so that everyone can be pleasantly surprised when results are better than expected. Not every miss means a company is in big trouble, but it does throw up a caution flag and requires a deeper dive into the reasons behind the miss.
P/E Ratio: The current stock price divided by last reported annual earnings per share.
P/E Ratio (Projected): Current stock price divided by the consensus analyst estimate of earnings per share for the next fiscal year (12-month) or the next two fiscal years (24-month).
Price-to-Sales Ratio: The current price of a stock divided by sales-per-share of the company in the most recent fiscal year.
Quarterly Earnings Change (%): The historical earnings change between the most recently reported earnings and the preceding quarter.
Quarterly Net Profit Margin (%): Net operating earnings after taxes for the latest quarter divided by revenues for the quarter.
Quick Ratio: A company’s cash and equivalents divided by current liabilities. This is an indication of a company’s financial strength.
Selling Into Strength: After good news such as a strong quarterly earnings report, even weak companies will see shares rise up briefly. Occasionally, I recommend “selling into strength” with our weaker stocks to maximize our returns by selling at the top of the bounce a company gets after earnings. Sometimes the difference in share price can be significant day-to-day.
Standardized Unanticipated Earnings: Relates the average earnings surprise at a company to the dispersion of analysts’ earnings estimates for the company and can be used to estimate the future likelihood of earnings surprises.
Whisper Number: At one point in time, this was the unofficial and unpublished earnings per share forecast that circulated among professionals on Wall Street and were generally reserved for specific high-value clients of a brokerage. As scrutiny on the brokerage industry has increased, it has been more difficult for whisper numbers to circulate, and the phrase is commonly used to refer to rumors of expected earnings surprises or misses.