What Investors Need to Know About Earnings Season

Travel back in time to when you were a kid in school. Chances are you got a report card four times a year and like it or not you had to show it to your parents. Public companies often release report cards of their own: quarterly earnings reports.

And just as parents tend to pore over their kids’ progress reports hoping to spot good grades, Wall Street scrutinizes earnings reports to assess corporate performance. As a result, you’re likely to see heavy media coverage during earnings season — the weeks-long period each quarter during which most companies issue their quarterly results.

Here are some important things you need to know about earnings season:

When Does Earnings Season Take Place?

Earnings season generally starts one or two weeks after the end of each calendar quarter (that is, a couple weeks after March 31, June 30, September 30 and December 31) and lasts about six weeks.

The upcoming second quarter earnings season, for instance, will start in early July. Subsequent earnings seasons will begin in October, January and April.

In most cases, companies’ quarters line up with the calendar year. But some have their own fiscal calendar and their earnings report release schedules follow accordingly.

The unofficial “kick off” of earnings season happens when aluminum giant Alcoa Inc. reports its earnings. In the past, Alcoa, which has announced plans to split into two companies, was the first component of the Dow Jones Industrial Average to report, and the tone of its earnings was seen as a predictor for the quarter overall. Today, while Alcoa still starts earnings season, it’s no longer in the Dow, and is considered less of a bellwether.

What Exactly Happens During Earnings Season?

Generally speaking, a company will issue a press release providing some basic financial information, such as the company’s sales and earnings, even though this is not an SEC requirement.

These press releases might also include forward-looking information — an indication of what management believes its numbers will be in the future. If a company issues a press release, it’s required to file a Form 8-K with the SEC, which must include the text of the release.

“Companies typically issue their press releases before the market opens or after the market closes,” said Howard Silverblatt, senior industry analyst, index investment strategy for S&P Dow Jones Indices.

Many companies also hold earnings conference calls. During these calls management might give more color on the quarter and also provide guidance on the company’s future performance.

Why has it become customary for companies to issue quarterly earnings press releases when it’s not mandatory to do so? If the results are positive, companies are eager to disseminate the numbers as soon as possible. If the information is negative, it gives companies an opportunity to prepare their investors before they file their mandatory quarterly earnings disclosures with the SEC.

What Types of SEC Filings Are Required On A Quarterly Basis?

In the weeks that follow the earnings press release, companies will issue more information in required filings with the SEC. After each of the first three quarters of the year, they’re required to file a Form 10-Q. The deadline for this filing is 40 to 45 days after the end of the quarter, depending on the size of the “public float” of a company’s shares. For instance, Alcoa issued its first quarter 2016 earnings press release on April 11, and filed its 10-Q for the quarter on May 5.

Companies include their fourth quarter information in an annual report called a Form 10-K, due 60 to 90 days after the end of fiscal year, depending on the company’s public float.

As with the 8-Ks and 10-Qs, these filings are always available publicly, and can be found through a company’s investor website or the SEC’s EDGAR database.

The 10-Q and the 10-K will contain more detailed financial statements as well as an explanation from management of any important changes that may have transpired in the quarter. You’ll also likely see analysis of what factors impacted the company’s performance. Investors might find valuable information tucked away.

The requirement for public companies to report their earnings on a quarterly basis, as opposed to semi-annually, dates back to 1970. But lately the idea has come under fire. Critics say the demands of providing updates to investors four times a year puts pressure on companies to focus on meeting short-term goals. The desire to “hit the numbers,” becomes a priority over investing in the long-term term health of their businesses, critics contend.

The SEC recently published a “concept release” that looks at the disclosure requirements for public companies, including quarterly reports, and suggests that less frequent earnings releases might be a better approach for certain companies.

What Tends To Happen To Stocks During Earnings Season?

Earnings season can be a volatile and active time in the stock market.

Before earnings are released, Wall Street analysts come up with estimates as to how they expect a company to perform.

When a company does better than the consensus estimate — an estimate based on the combined estimates of all analysts covering a company — it is known as “beating” the estimate. That may cause a company’s stock to jump. If earnings are weaker than the consensus, or “miss estimates,” the stock may tumble. If the analysts were right in their estimates, a company will often be said to have “met estimates” or to be “in line” with estimates. Sometimes, though, there may be a so-called whisper number that differs from the consensus that may become the market expectation.

But simply beating or missing estimates isn’t always what moves a company’s stock price. Sometimes a company may beat estimates, but provide a dour outlook for the coming quarter, leading the shares to drop. That’s why it’s important to look at an earnings release in its entirety or await the filing of a 10-Q or 10-K.

“What really drives stock price is when something is unanticipated,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.

What Is The Bottom Line For Investors?

Earnings season offers investors a chance to look under the hood to get a handle on the performance of public companies, which can be a helpful tool for investors. But it’s important to look beyond one quarter’s numbers to get a clear handle on a company’s prospects.

“Make sure you understand what’s happening. Are they gaining market share or are they losing market share? Are they investing in their future?,” Gordon said. “That can be more important than looking at one quarter.”

You can find all of a company’s past earnings statements — as well as other important regulatory disclosures — at any time on the SEC’s website.