EARNINGS REPORTS, ANALYST EXPECTATIONS AND SHARE PRICES.
Written by: Robert and Russell Markham
As an investor, I like to keep my eye on upcoming earnings reports. In recent months, we have seen that the market has been in no mood for results that miss the consensus forecast.
The most recent case has been A2 Milk (A2M.AX). As of 21st August, A2M.AX reported with some exceptional numbers:
* Total revenue of NZD: $1,3045.5 million – an increase of 41.4%
* EBITDA of NZD: $413.6 million – up 46.1%
* Net profit after tax of NZD: $287.7 million – up 47.0%
But how did A2M.AX perform on the day of announcement? I watched the opening on A2M.AX and kept my eye on the price for a good part of the day, at one point the share was down over 16% and closed down over 13% from the prior day.
So why such a sell off? The revenue numbers really stand out! It most likely came down to expectations not being met. A bit of investigation work and I came across this article in the Sydney Morning Herald:
“A2’s total revenue climbed 41.4 per cent to $NZ1.3 billion, in line with analyst expectations. But its net profit, of $NZ288 million, was narrowly below Bloomberg consensus forecasts of a $NZ296.75 million result.” Go to the following site to read this article. (https://www.smh.com.au/business/companies/china-sales-surge-helps-send-a2-milk-s-profit-up-47-per-cent-20190821-p52j5h.html)
There was further insight from the Australian Financial Review as well:
The market seems to have overacted to what has been a very pleasing earnings report overall. But expectations are expectations and, in this case, some expectations were not met and the resulting sell-off took place. Rather than get into all the specific reasons for why the report was not pleasing to all investors, the key takeaway here is that earnings reports need to meet or beat analyst consensus forecasts. Headline figures of significant profit figures and growth are important, but if the market expects more and less is delivered, the share price often gets sold down heavily.
So what can we do as investors? Firstly, become aware as to when the earnings reports will be released. One such website you can check is the Bloomberg upcoming earnings calendar: https://www.bloomberg.com/markets/earnings-calendar/australia
I find that this earnings calendar works well. Using a calendar like this will ensure you are aware of the all the earnings reports coming up. A few days back, I could see that A2M.AX was going to release its earnings report thanks to the forward looking earnings calendar.
If you are concerned that earnings will not meet the market expectations, you can always sell out the day before, wait for the announcement and then buy back in later. As noted a few weeks back, you can also consider buying a put option. The put option will go up as the share price falls. We can take such measures should we choose as we do run the risk where the earnings report does not meet expectations. Where an earnings report exceeds analyst expectations, you will be buying back in at a higher price. However, consider the flip side, where earnings reports disappoint, you could be nursing a heavy hit to the share price.
VectorVest provides a 12-month leading forecast on earnings. If I pull up a VectorVest Graph for A2M.AX, I can see that earnings currently shows us a smooth left to right pattern of a rising set of earnings. This is a good sign. A2M.AX certainly has continued to grow their earnings year-in and year-out for the last few years. We have seen the share price growing year-in and year-out for the last few years. Also, if we take a look at the Comfort Index, CI, we can see that as of 21st August, it still stands at 1.53. CI reflects a stock’s ability to resist severe and/or lengthy price declines. Yes, along the journey there have been setbacks. That is where your risk and money management rules come into play to protect you.
Today, the market expectations on the earnings were not in line with what consensus expected…but let us not forget, earnings are rising. Rising earnings lead to rising share prices…if those earnings continue to grow, year-in and year-out, you will see the share price continuing to increase, despite setbacks.
So, would today provide a great opportunity to buy at a lower price? To answer that question, load up Market Timing Graph and then put on the Confirmed Calls. Where are we currently in terms of Market Timing? We are currently in a Confirmed Dn, C/Dn, situation. We advocate at VectorVest to buy rising shares in rising markets. I would suggest you wait for the C/Up signal to take place, check the earnings profile on A2M.AX and check the price pattern to ensure a smooth profile in price is continuing…if that all stacks up, then you can consider A2M.AX. To buy shares of anything in a C/Dn is a recipe for losses.
DISCLAIMER: THE ABOVE ARTICLE DOES NOT CONSTITUTE FINANCIAL ADVICE. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU SHOULD CONSULT WITH YOUR LEGAL, TAX, FINANCIAL, AND OTHER ADVISERS PRIOR TO MAKING ANY INVESTMENT