I'm sure you've seen the (overly) dramatic headlines on CNBC:
Investors Gearing Up for Earnings Season
Earnings Season Kicks Off Tomorrow
Earnings Alert: AAPL Misses, Stock Off 10%
Reporters and purveyors of financial entertainment television love earnings season. It's a time when a lot of new information hits the market and there are a lot of earnings misses and beats and after hours stock moves.
As an analyst, it's like trying to drink water from a fire hose.
Today we learn all about earnings season and what it means for both the sell side analyst (associate) and the buy side analyst. We're going to discuss:
- What exactly does “earnings season” mean and when is it?
- What does earnings season mean for the sell side analyst?
- What does earnings season mean for the buy side analyst?
- Can you use earnings season to break into Wall Street?
Ready? Time to release the fire hose …
What the Heck is Earnings Season?
If you watch CNBC regularly, you might be thinking: “When is it NOT earnings season?” As an analyst or portfolio manager, sometimes you wonder the same thing.
Thankfully, though, earnings season only happens quarterly. Every company is required to release their updated financials at the end of every quarter in the US (some international countries only require semi-annual updates).
In addition to releasing financial statements, though, companies will typically give an update on their business and provide an outlook for the future. Earnings season reaches its peak during the latter half of the first month after the end of a quarter (January/February, April, July, and October).
During the periods of time between earnings, sell side equity research analysts will publish their financial models and resulting earnings estimates for the companies they follow (sales, EBITDA, earnings per share, etc.). When there are several sell side analysts covering a single company, a consensus estimate forms. The consensus estimate is simply the mean or median of all the sell side analysts' estimates.
Consensus estimates are important during reporting season. These estimates often form the basis by which investors (buy side analysts) will value a stock. They become the baseline expectations of the market. The real fun comes when actual reported results differ greatly from consensus.
For example, let's say the market was expecting XYZ to report earnings per share (EPS) of $1.00 but the actual reported result is only $0.90. This is what you will hear called a “miss” - the actual results missed expectations. If Mr. Market was valuing XYZ using a 15x P/E multiple, the value of XYZ is suddenly 10% lower assuming the same applied 15x P/E multiple.
In general, though, most companies do a good job of under-promising and over-delivering. As a result, investors expecting in line earnings or modest earnings beats and will often severely punish earnings misses.
Earnings Season on the Sell Side
Earnings season is quite busy for equity research analysts and associates. When a company in your coverage universe reports earnings, either after market close or before market open, you will usually be expected to put a brief research note out highlighting the important parts of the press release.
At this time, you will also begin rolling your financial models forward to account for the newly reported actual results as well as prepare questions for the earnings conference calls companies typically hold for analysts and investors.
Assuming your companies report “as expected” results, that's all you will do until the companies have their quarterly conference call (usually the next day).
If one of your companies misses badly or introduces new information to the market, you will be sent scrambling to make sense of everything. Buy side analysts demand insight and speed in information, so sometimes your role as a sell side analyst can resemble that of a reporter. You are trying to make sense of new information and be the first to communicate it to the buy side.
When it comes time for the earnings conference call, you will listen in and have your prepared questions ready. Conference calls allow analysts to probe for more information and make sense of the earnings release.
After the call, you will update your models to send to clients and write a follow-up research note summarizing earnings while adding any insight to the news received, including an updated Buy/Sell/Hold recommendation.
Earnings Season on the Buy Side
Earnings season on the buy side is a bit easier than the sell side, but that doesn’t mean it’s a fun time. Not by any stretch of the imagination. As a buy side analyst you will be updating your own proprietary financial models and listening to conference calls, but you won’t be issuing formal research reports like sell side analysts.
Buy side analysts will usually take notes and provide updates to their PMs, but formal research reports usually are not produced unless there was enough new information that you need to re-visit your investment thesis.
For example, let’s look back at the 10% earnings miss from XYZ earlier. If you are long that stock and the market pummels it down 10%, then you are going to have a bad day. It’s a fair guess to say your investment thesis did not anticipate a 10% drop in the stock.
In that scenario, your PM is going to demand an update and a revised thesis on that stock. You’ll need to determine, in a short period of time, whether the market has overreacted and the stock now looks cheap, or whether your thesis is busted and you should cut and run.
When it comes to conference calls, buy side analysts will be listening, but rarely will you hear buy side analysts and PMs ask questions. Buy side participants usually don’t want to tip their hand to other buy side investors by exploring a line of questioning that might get other investors interested (you don't want other investors front-running your ideas).
As a buy side analyst, management teams will take your phone calls so you can follow-up with a call to ask any questions you might have.
How You Can Use Earnings Season to Break In
So what does all of this mean for you?
This is where a little bit of practice can go a long way. When you are looking to break into Wall Street, be it asset management, hedge funds, or equity research, being able to “talk the talk” in interviews can go a long way to proving you are the best candidate.
If you truly want to break in, you need to spend some time analyzing companies and making financial models. Here is a road map I would follow today if I was trying to break into the business:
- Identify a group of companies within a sector that interests you. Stick with big, household names as research will be more readily available.
- Create financial models for your companies. If you are new to financial modeling, note that I’m an affiliate of and recommend Breaking into Wall Street. Brian is a consummate professional and he always delivers excellent products.
- Go through earnings season as if you are a buy side or sell side analyst. Read the press releases, update your models, and listen to the to the conference calls.
- Take all this information and make a stock pitch for one of your names.
Sound like a lot of work? Well, it is. In this case, though, the ends justify the means. Almost all of your competition won't bother doing anything even remotely close to this type of preparation. I know because I've been in interviews where the candidates clearly have no idea how to analyze a stock.
Don't be that person.
Be the one who diligently prepares and you will be the one who lands the job. Now go to work and prepare to start drinking next earnings season.