Heads up, and hold on to your seatbelts! Earnings season is near. Companies will start releasing earnings next week to provide traders and investors insight into their performance with their earnings reports.
What is an earnings report?
An earnings report typically contains earnings per share, net income, earnings from continuing operations, and net sales. Investors and analysts use this information to understand a company's financial condition and project its potential for future growth.
How does it affect stock price?
Earnings reports can significantly impact a company's price. A positive earnings report can lead to a stock’s trading price trading higher, while a negative earnings report can result in a drop in stock prices. Occasionally, a company's stock price can move drastically in response to an earnings release that increases trading activity and volatility in the stock market.
Can you predict earnings and profit from it?
Predicting the Company’s results is simply a coin toss at best. The results can be anyone's guess, and the investors' reaction is even trickier to predict. Investors must understand that there will be higher volatility following an earnings report in most cases, as investors can react differently to the report. If you’re wondering if buying a stock before earnings, I’d say if you’re investing for the long term, it’s best to wait for the dust to settle. Then, you can gauge the overall direction of the stock and a trend to emerge.
How can I know which companies to look out for?
One of the ways investors use to look at a company’s predictability of beating its earnings is by reviewing its historical earnings surprise. The earnings surprise occurs when the reported earnings beat or miss the analyst expectations. If a company routinely exceeds expectations (quarter by quarter), they are probably doing something right. Hence, assessing a company’s predictability of beating its estimates would be easier.
Now, let’s look at two companies constantly beating their earnings estimates.
Abbot Laboratories (ABT)
Abbott Laboratories is a diversified healthcare company that provides various products and services to the healthcare industry, including pharmaceuticals, medical devices, and nutrition products. with operations in more than 160 countries and has been founded in 1888. Today, Abbott is a company with a long-term vision. They have a diversified business model with several businesses that should continue to grow over time.
Analyst Rating and Historical Surprises
Analysts rate ABT as a “Strong Buy” based on 11 Strong buys, 3 Moderate buys, and 2 Holds. Mean estimates for ABT are $ 121.87 and a High target price of $140.00m, an upside of 34.34%.
ABT’s historical surprises show ABT beating its earnings estimate for the last 4 quarters consistently. This is a sign of the company’s predictability in beating its earnings estimate in the future. Investors willing to buy into ABT should always conduct due diligence to manage risk and asses the company's potential growth through its plans and business strategies.
Linde PLC (LIN)
Linde Plc is a multinational diversified industrial gas, chemical, and engineering conglomerate. It is one of the leading companies in industrial gases and the engineering sector. The company was created in October 2018 through the union of Linde AG and Praxair. Its headquarters are in Dublin, Ireland, and Woking, Surrey, UK. Additionally, the company employs ~65,000 employees. Linde Plc has operations all over the world, and the company’s operations are mainly divided into two segments:
- The Gases segment provides industrial, specialty, medical, refrigerants, and other chemicals to various clients from different industries.
- The Engineering segment, famously known as Linde Engineering, offers design and construction services for building large-scale chemical plants that are used to produce industrial gases. This segment has built over 4,000 plants worldwide. It also has over 1,000 process patents.
Analyst Rating and Historical Surprises
LIN is rated as a “Strong Buy” by analysts based on 15 Strong Buys and 2 Holds from analysts. The mean estimate is $372.69, and the High estimate is $418.00, with an upside of 17.54%.
LIN’s earnings surprises have been consistent in terms of beating its estimates for the last four quarters. This predictability of a consistent positive earnings surprise makes LIN one of the companies worth watching this earnings season. Even with the current market conditions, its excellent performance (29.43% YTD) this year tells us that we may see even higher prices should LIN continue to beat earnings estimates.
Final Thoughts
Following a stock's earnings releases is a good practice for investors wanting to asses their current portfolio or rebalance it. This gives investors a clearer view of how the stocks they hold have been growing or what growing business they should add to their portfolio. However, investors should not focus on earnings alone. Other factors can still impact the business, and an earnings miss is not the end-all-be-all of the company. Proper due diligence is always a must.
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.
