With the earning season nearing its close, investors have seen a lot of companies losing steam from their bullish runs. In contrast, others are being aggressively bought due to renewed confidence and interest in the company. Investors who focus on those companies will see a common metric being looked at by the market. The “Earnings Surprise.” This is the percent difference between the actual earnings from the analysts' expectations. This allows investors to easily see if the company has been performing better than expected or has been unable to keep up with the market's performance expectations. To better understand earnings surprise, let’s first look at earnings reports.
What is an earnings report?
When a company is listed on an exchange, it must regularly file reports with the Securities and Exchange Commission. These reports give the investing public a view of the company. For example, a company may report important financial data about the company’s current performance and financial health.
Quarterly earnings reports give investors a view of a company's performance over three months. These results can help shape an investor's or analyst's view of the company's future performance. As a result, when earnings are released, investors react aggressively when companies disappoint or beat expectations which is referred to as an “earnings surprise.”
Earnings surprise?
A surprise happens when a company reports its earnings and deviates from its estimates. A company beats expectations when its earnings are reported higher than expected, and misses if it is lower than expected. While earnings are important, it's still all about expectations. In earnings season, companies can easily move 15% (in either direction) when their quarterly earnings are released. In other cases, a company will have a blowout quarter that causes the stock to plateau or decrease because the market's optimism was too high.
Why are earnings estimates important?
Earnings estimates are used by analysts as a barometer for the company’s expected performance. This helps set the tone for the optimism on the stock. If earnings results deviate from these expectations, the stock's price can respond in either direction. If a stock is moving upward and its quarterly earnings are positive, the stock price can increase in most cases, but that is not always the case. There is a possibility, however, that the stock price could fluctuate and move lower due to underlying issues mentioned in the earnings report, company outlook, or misses in other areas besides earnings. That may look counterintuitive in most cases due to market expectations, but expectations are a major driver of stock performance due to the market being forward-looking.
Can you use historical earnings performance to make future decisions?
It's said that “past performance is not indicative of future results," yet, past performance is how we compare investments. Indeed, there is no foolproof method of predicting future results for stock performance, but a stock's historical earnings performance can still help investors anticipate future market movements. As these earnings results can sometimes provide investors and analysts a pattern or trend on how prices react when the company beats their estimates, the historical results also show if companies tend to grow at a certain rate for a period or a steady rate per quarter. This allows investors and analysts to create assumptions for their forecasts on the stock.
Let’s look at companies that have consistently beat their earnings estimates and have further growth potential.
Exact Sciences Corporation (EXAS)
Exact Sciences Corporation is a global cancer diagnostics company specializing in earlier cancer detection and treatment guidance The company’s products and services focus on screening and precision tests in oncology. The company's research and development efforts are focused on three main areas:
- Colorectal Cancer Screening
- MCED Test Development
- MRD Test Development
The Company’s products include the Cologuard test, Oncotype DX Breast DCIS Score Test, Oncotype DX Breast Recurrence Score Test, OncoExTra Test, Oncotype DX Colon Recurrence Score Test, and COVID-19 Testing. Its current flagship screening product, the Cologuard test, is a non-invasive, stool-based deoxyribonucleic acid (DNA) test that uses a multi-target approach to detect hemoglobin and DNA biomarkers associated with colorectal cancer and pre-cancer.
Consistent surprises
The company has consistently grown and beat its earnings estimates for the last four quarters. Even though the company earnings are not positive, analyst estimates also continue to show optimism in their estimates, with higher eps estimates year on year.
RLJ Lodging Trust (RLJ)
RLJ Lodging Trust is a real estate investment trust (REIT) that primarily owns branded, focused-service, rooms-oriented, and compact full-service hotels located within the United States. The company is self-advised and self-administered and owns a portfolio consisting of over 96 hotel properties with approximately 21,200 rooms. These properties are located in 23 states in the District of Columbia, and an ownership interest in one unconsolidated hotel with 171 rooms.
The company has hotel brand affiliations, including:
- Marriott
- Courtyard
- Residence Inn
- Fairfield Inn & Suites
- Marriott, Renaissance
- SpringHill Suites
- AC Hotel and Moxy
- Hilton Garden Inn
- DoubleTree/DoubleTree Suites by Hilton
- Hampton Inn/Hampton Inn & Suites
- Curio Collection
- Homewood Suites
- Hyatt
The company operates through its operating partnership with RLJ Lodging Trust, L.P.
A small slump in estimates, but it still delivers
The company has consistently beaten its estimates for the past four quarters. Numbers fluctuated in surprise but remained consistently above 10%. Earnings were shown to be cut by analysts for 3rd quarter this year but are expected to be back up afterward based on analyst expectations.
Planet Labs Pbc (PL)
Planet Labs PBC is daily satellite imagery and geospatial solutions global provider that designs, builds, and operates an Earth observation fleet. The fleet of imaging satellites captures and compiles data for analytics to reveal actionable insights regarding a large array of important phenomena. This includes:
- Deforestation
- Agriculture
- Climate change
- Biodiversity
- Worldwide supply chains
Its daily stream of proprietary data and machine learning analytics are delivered over its cloud-native platform, which helps governments, companies, and civil society that uses satellite imagery to discover insights as change happens. The Company serves around 880 customers across large commercial and government verticals, including agriculture, forestry, mapping, finance, insurance, and federal, state, and local government bodies.
Incremental growth with optimistic expectations
PLC has shown consistent results in beating market expectations. The company has delivered at least four consistent quarters of more than 10% surprise from analyst expectations. Analyst earnings forecast also show their growth in year-on-year earnings growing larger in the upcoming quarters.
Final Thoughts
Analyst estimates and company performance are front and center during earnings season as the company's performance sets the stage for future expectations. Remember, while optimism may be contagious as it feeds our bias, an objective view is still important when investing. Any recommendation from the experts can still be proven wrong by the market. As a result, due diligence is necessary when it comes to picking stocks, as it's not always about the size of the profit you make but also the losses you take.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
