Earnings Season: What it is, How it Works

What is Earnings Season?

Earnings season refers to the months of the year during which most quarterly corporate earnings are released to the public. Earnings season generally begins in the month following most major companies' fiscal quarters. This means that earnings seasons typically fall in January, April, July, and October, because firms need time after each quarterly accounting period ends to put together their earnings reports.

When is Earnings Season?

The unofficial kickoff to earnings season is the release of earnings by Alcoa (NYSE: AA), an aluminum producer, as it is one of the first major companies to release earnings after the end of each quarter. It also coincides with an increasing number of earnings reports being released by other public companies. There is no official end to the earnings season, but it is considered to be over when most major companies have released their quarterly earnings reports. It generally occurs about six weeks after the start of the season.

For example, for the fourth quarter, you will often see an increasing number of earnings reports released in the second week of January (Alcoa typically releases at the start of the second week). About six weeks later, or near the end of February, the number of earnings reports starts to decrease to pre-earnings season levels. There is also very little time between each earnings season. For example, the earnings season for the first quarter begins in early April, which is a little over a month after the end of the fourth quarter earnings season.

Although most companies are on a standard calendar year, some major public companies have fiscal years that do not correspond with a calendar year. For example, Walmart (NYSE: WMT) has a fiscal year end of January 31. This later fiscal year end date allows ample time following the holiday season in order to fully capture all holiday purchases in year end profits. Therefore, Walmart will likely release its earnings to the public toward the end of a typical earnings season.

Earnings Season and Investors

Earnings season is easily the busiest times of the year for those who work in and watch the markets, as virtually every large publicly traded company will report the results of their last quarter. Analysts and managers typically set their guidelines and estimates to correspond to specific quarters or fiscal year endings, so the results reported by firms during earnings season often have a big role in the performance of their stocks.

Some analysts like to calculate a company's earnings before taxes (EBT). This is also referred to as pre-tax income. Some analysts like to see earnings before interest and taxes (EBIT). Still other analysts, mainly in industries with a high level of fixed assets, prefer to see earnings before interest, taxes, depreciation, and amortization, also known as EBITDA. All three measures depict varying degrees of profitability.

As earnings season approaches, many analysts will conduct intrinsic valuations to determine if the current market price of a company’s stock is over- or under-valued. This informs investors whether or not to purchase, sell, or hold the stock. Fundamental analysts will look at the qualitative (business model, governance, and industry factors) and quantitative (ratios and financial statement analysis) aspects of a business. The discounted cash flow model is one commonly used valuation tool, which relies on a company's free cash flow and weighted average cost of capital (WACC).

Earnings Calls

During earnings season, investor relations teams will set up earnings calls, where the public can dial in and listen to the executive team describe the company’s results for that quarter. Topics generally covered during earnings calls include a discussion of financial performance, any management changes, changes in corporate governance, legal involvement, industry changes, and more. Many different measures of earnings exist, and management usually discusses the context for a company’s results.

The vast majority of publicly listed companies host earnings calls, though smaller companies with minimal investor interest may be exceptions. Many companies also provide a phone recording or presentation of the earnings call on their corporate websites following the actual call, making it possible for potential investors or those who could not log in to access this information. You can also access the SEC's EDGAR system, which is the most complete resource for all earnings reports.