There are four earnings calls each year that have a critical impact on a stock. These events coincide with what is known as earnings season. A time where companies release their quarterly earnings results to the public. A company’s earnings can drive it’s stock price up or down. But how do we know how good an earnings release really is?
Earnings are so important that a whole sub industry has been created just to study a company’s future earnings potential. Analysts, as their called, release an earnings forecast or estimate, which can have a big impact on a stock price. I use the term “forecast” loosely, analysts like weathermen, can often be wrong. That being said, a the stock price is tied to how well a company’s earnings compare to the average analysts estimate. If a company beats the estimates, the stock usually rises in value. And does the opposite if it fails to meet the estimates.
The Analyst Estimate
An analyst is charged with studying an industry and the publicly traded companies within it. Companies in the same industry do business in similar ways, have similar products and services, and tend to react similarly to economic changes. By studying these things, the analyst can make an educated guess to a companies future earnings, provide a stock rating, and a potential target stock price if their estimates are achieved.
If you own stocks or have a brokerage account, you’ll come across analyst estimates being revised, upgraded, updated, initiated, downgraded and the stock price will move entirely on these changes. This happens because the market is starving for information. Continue Reading…