Another earnings season, another lesson for shareholders that financials (Sales, profits, etc.) are only half the story, in some cases much less, now history, possibly reported months after the given period ended. What really counts is the message from management, about where the business is going and the profits the company is expected to make in the year/s ahead.

As I’ve said many times, outlook is king. You can’t buy past profits/growth; you can’t drive forward using the rear-view mirror. Shares are priced to discount the value of future earnings. If the value of those earnings is now higher or lower, the share price will need to be repriced up or down. Hence the pain of a profits warning, which can send shares sharply lower (as much as 10-50%), and the joy of upgraded guidance, which can send shares nicely north (up to 10%).

Here’s a few results season scenarios to help illustrate the range of potential share price outcomes:

• Results in-line with management guidance and market expectations; Outlook in-line with broker consensus forecasts. Muted share price reaction. If the shares rallied into the results, there may even be some profit taking.
• Results in-line, but outlook better than consensus (e.g. 10% growth next year vs. consensus 5%). The shares rise as investors re-price for higher future profits.
• Results in-line, but outlook worse than consensus (e.g. no growth next year). The share price falls as investors re-price for lower future profits.
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• Results beat (e.g. £100m profits vs. £85m est) and outlook better (10% growth next year vs. consensus 5%). Yes, you’ve guessed it – the shares rally. The future’s brighter!
• Results beat (e.g. £85m profits vs. £100m est) but outlook worse (no growth next year). The share price falls to factor in worse future growth.
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• Results miss but outlook better. The shares rally. So long as the miss was minimal, ensuring the growth – from a now lower starting point – means the now revised future profits are still higher than consensus.
• Results miss, and outlook worse. The shares ………do I really need to say it?

Other things can also play a role, independent of management’s official outlook statement, but most will ultimately have a bearing on the future, and thus the share price.

Financials, such as profit margins, cash flow, investment/CAPEX, debt, impairments (e.g PPI provisions) can alter broker forecasts, and thus share price valuations. Dividends: If a share yielded 10% last year but is only going to yield 3% going forward, this will render the shares far less interesting to income seekers, especially in a low interest rate environment. Share buybacks can offer support to the share price. New products: success or failure will impact future earnings. M&A/Strategy/Management changes can change where a company goes, what it will look like, and how it is valued.

My point is that companies will do everything to make results sound great to the reader, with lots of talk of big percentage growth and targets being hit. Think politicians and spin, and keep a some salt handy. Expect all the good news up front, and bad news deep down in the report, making you work to find it. Which is my job.

As much as I look to see how revenues and profits did versus expectations, my next port of call is the outlook statement for any changes, which can be very subtle. Such as “profits growth of more than 10%” in the previous report becoming merely “profits growth of 10%”. And then it’s off to scour for anything about supportive buybacks and dividends, or rising costs and the like. If I’ve said it once, I’ve said it a thousand times. The devil is in the detail. Never in the headlines.

How can we at Accendo help you through earnings season?

1. By providing you with broker previews before the results, so you know what the analysts and thus markets are looking for (growth, margins, products, dividends, etc).
2. Quick comments from your dedicated trader once results are released at 7am.
3. Opening calls: indications of where shares are expected to start trading in reaction to the results, giving you an opportunity to decide what to do. If the results/outlook were great, do you react immediately, or wait for the dust to settle? Do you buy the shares in the hope they rise further? Add to your existing position? Hold your position for a better exit point? Wait for a better entry point? If the results were bad, do you; Dump your shares at the open? Hold on for a better exit point? Your decision – we’re here to help.

As my colleague writes, there are lots more UK Index companies left to report this earnings season. The Housebuilders stick out as a retail investor favourite next week. After several exciting share price moves this week (Barclays +6%, IAG +5%, Lloyds +3%, RBS -4.5%, BATS -5%), there is a high chance we see similar reactions to results and outlooks next week, and thus attractive share price moves for you to capitalise and profit from.

Some big names on the roster next week include Associated British Foods, Direct Line Insurance, ITV, Standard Chartered and Taylor Wimpey. For a fuller list, contact us. As for what their shares might do on results day? For that you’ll be needing previews, so drop me a line.

Mike van Dulken, Head of Research, 23 Feb 2018