Earnings Momentum
Remember your statistics classes, where you learned about second derivative figures? Okay...how about physics, where you learned about the difference between the speed of something and the acceleration of something?
No? Yeesh. Guess we'll start from scratch...
Every quarter, a company reports how it performed over the previous three months. This is called its earnings announcement. These figures include the company's profit (assuming it didn't lose money during the quarter), as well as figures like revenue, gross margins, etc. The profit total is also known as the company's earnings.
Whether or not a company is doing well largely depends on whether its earnings are growing. That is, the firm's profit should be higher now than it was in the past. Usually, this comparison is made with the same time last year...so Funny Cat Video Production Corp. should have a larger earnings figure in 2018 than it did in 2017. That's earnings growth...something investors want to see.
However, sometimes investors are also interested in the rate of growth. When applied to earnings, this is commonly referred to as "earnings momentum."
So from 2016 to 2017, Funny Cat Corp. saw its earnings grow 25%. But from 2017 to 2018, this growth only reached 18%. What's going on? Why is Funny Cat losing earnings momentum? Do they need a new CEO? Do they need to acquire Hilarious Puppy Multimedia to extend their brand? That's the kind of thought process that happens on Wall Street.
Of course, the earnings momentum can go the other direction. If Funny Cat posts 2016 growth of 12%, 2017 growth of 21%, and 2018 growth of 35%, analysts might start gushing about its accelerating earnings momentum, and money will start piling into the stock, possibly risking a Funny Cat bubble.
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Finance: What is a whisper number?16 Views
Finance allah shmoop what is ah whisper number all right
this is but hair implants it's going to be the
next amazon Trust me anyway be h i is trading
at one hundred times earnings five times the price to
earnings multiple of the average growth stock today trading it
twenty times earnings last year be h i earned a
dollar a share It has a buck or two a
share in cash and no debt It has communicated a
wall street through its quarterly conference calls and meetings with
analysts that it's coughing lee hopes to earn a dollar
fifty this year a dollar to a dollar fifty what
we did there with the word coughing Lee you know
it's not from these cohibas we cough because they cough
when they say a dollar fifty Why Well because we
do the math on a few of the key metrics
they've given us Like they said we're opening another two
thousand stores in eastern europe almost double our number in
the u s today and they say we're supply constrained
just not enough but hair to go around so we're
shopping for more Apparently slovenia has had excellent harvest this
year and then they say people are growing older boulder
and yeah there really is something about all that wifi
in carrying cellphones in your pocket all the time yeah
that's what they say and that was the recording of
them saying it really we were there All right so
if you had everything up and put the above data
and a few other teen nuggets of information you've gleaned
about their hair growth industry perspective well then your financial
model would show earnings this year something more like three
or even four dollars a share not that paltry dollar
fifty that they're telling everyone they hope to make if
they try really hard So you wonder why on earth
would the cfo of but harry implants guide analysts in
making them believe the company would only earn a dollar
fifty when she and everyone around her thinks that more
likely the number is going to be three or four
bucks a share in earnings this year Well lawsuits for
one puns of ambulance chasing scummy lawyers out there claiming
they're acting in the best interest of you know bubba
shareholder they're just waiting for a stock to drop and
then they sue the company for you know stuff and
then there's other things not communicating well enough not marketing
well enough of not being able to predict the supply
line of their butt hair well enough Yeah you name
and the lawyers will see you for it Cos also
love being heroes and they love beating their estimates toe
wall street all the time It just makes him you
know feel good under promise over Deliver that thing All
right So along comes first quarter's earnings and last year's
first quarter showed earnings of sixteen cents a share Your
went by quarter like this sixteen twenty three one nine
Thirty There you go So the street is expecting at
least thirty two cents in earnings this quarter It'd be
growth of one hundred percent over the period a year
ago But one hundred percent growth from last year would
give the company earnings of two dollars a share So
that's not what the street is really thinking when it's
paying one hundred dollars a share for this stock If
they were actually thinking the stock would really print on
ly two dollars a share in earnings the stock would
probably not be trading for one hundred boxes share and
probably more like fifty there's nothing trades at fifty times
actual earnings or at least not fifty times what wall
street actually thinks the company will print The number of
the street is whispering It took us a long time
to get there the whisper number thing but we did
is forty cents a share in earnings there whispering that
the company says they'll dio something less than forty but
they better hit forty cents because that's what everyone's whispering
about If the company hits forty cents in its first
quarter's earning to report while learning through the rest of
the year could go something like this you know forty
fifty sixty seventy and then that would produce to twenty
years share in earnings and i would be the absolute
minimum the company would need to keep anything close to
its huge multiple or stock price It probably needs more
earnings growth to stay triple digits something like maybe forty
sixty eighty eight dollars something like that and then you're
in the three dollars in change number and that would
work a lot better because then you're only treading it
Like twenty eight times earnings which is not some astronomical
multiple Got it all right Well the key idea here
is that the whisper number is the rial number that
actual investors care about the company hitting not what the
stockbrokers sell Side analysts published in their earnings estimates that
they hoped the company would earn thirty two cents Blah
ba blah ba blah Yeah can't trust your stockbroker in
that setting So the key idea here is the number
that matters is the whisper number whisper number because on
wall street you don't always die with a yell sometimes
it's just with a whisper like that so that's a
whisper number Now go out and buy a bunch of
b h i stock and remember i'm not on ly 00:04:50.415 --> [endTime] but harry implants client I'm also the president
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