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We take you through what matters on a results day.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
In the UK, listed companies usually announce results at seven in the morning.
An hour later the market opens and share prices start to move. The rises and falls on results day can often seem erratic, but there have tended to usually just be a small handful of things that drive how share prices respond.
With the bumper third quarter results season nearly upon us, we’ve set out key things that investors will be looking for among the hype and what can ultimately drive share prices for the long term.
It’s a lot less about numbers than you might think.
This article isn't personal advice. If you're not sure if a particular investment is right for you, seek advice. All investments and any income they produce can fall as well as rise in value so you could get back less than you invest.
In most cases the most important determinant of share price performance on the day of results is whether revenues, profits, dividends and cash flows are worse, in-line, or better than the market expected.
By market expectations we usually mean ‘consensus’.
Each investment bank analyst who covers a company will forecast key numbers for the set of results – attempting to predict profits for the quarter, half or full year. The average of all these estimates is market consensus – and is the benchmark businesses hope to meet when they report.
Unfortunately, getting access to consensus is very difficult for the general public. While some companies, like Imperial Brands and Pearson, deserve recognition for publishing consensus numbers on their website, and making them freely available to all, they’re in the minority. Generally speaking, consensus numbers are only available through expensive financial data subscriptions.
The good news is that lots of companies publish annual, semi-annual or even quarterly guidance. These targets, often for sales and profits, but sometimes going into very granular detail, tell you what the company expects to achieve in a given period.
Ten minutes spent looking at previous guidance the night before results will usually be well rewarded the following morning. Fast growing companies can deliver very strong revenue growth, but still disappoint expectations and see their shares punished. Conversely, companies that are struggling could see profits slide, but still enjoy a bounce in share price if results are better than feared. Knowing what the company itself is targeting will help you put the results in context.
If results are broadly in line with expectations – and management teams work their socks off to make sure they are most of the time – the next thing to look for is future guidance.
There’s a saying in investment that ‘you can’t buy last year’s profits’. However good the company has been in the past, it’s the future that guides share prices. Past performance is not a guide to the future. As a result, any comments about likely future performance get an incredible level of scrutiny from investors.
Formal guidance is obviously worth checking – are profits expected to be better or worse than last year? Is growth expected to accelerate or slowdown?
However, companies often provide other hints about the outlook. Management comments might talk about a ‘tough operating environment’, or give an update on recent trading (covering the period after the end of the financial year up to the results’ publication). Anything that gives a hint about what the future might hold has the potential to move the share price.
Companies often use results as an opportunity to talk about more than just recent operating results.
Results might also include changes in senior management (almost always bad news for the share price in the short term), discuss merger & acquisition plans or flag regulatory challenges.
More often than not, these announcements, especially if they’re sizeable, will be well signposted at the top of results statements. But if you notice these kinds of big one-off announcements, it’s worth having a quick scan of the detail further down the announcement to check everything is as it seems. In a business that’s otherwise sailing along, an unexpected and ill-suited acquisition can seriously rattle investor confidence.
Less exceptional perhaps, but just as important, are additional shareholder returns. Share buybacks and special dividends are almost always welcomed by investors.
They’re usually a vote of confidence in the current state of the balance sheet and in likely future performance. Again, commentary around these returns are well worth looking at, is this a one-off return of surplus capital or could it potentially become a trend?
It’s also worth noting that the share price benefits of a special dividend will usually disappear when the dividend is paid out, although a share buyback could have more lingering benefits.
All this assumes that market movements are responses to genuine changes in company results or substantive operating events.
Very occasionally, and far less often than you might think, markets behave in ways that don’t add up. Shares open down on results that should actually be considered pretty positive. That potential mistake could be rectified by the end of the day, although of course it could also fall further.
It’s often worth double checking back in the results. If shares have fallen, there’s usually a reason. It’s the challenge that faces investors to decide if that reason is a good one. If you’re not sure, it’s usually better to wait or get advice. While you might be able to spot an opportunity on results day, remember investments should be held for the long term.
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