• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
AAII How-To Earnings

How to Analyze Earnings Surprises

An earnings surprise occurs when a company’s reported profits are above or below financial analysts’ expectations, which can change its share price.

by John Bajkowski | July 2022

Featured Tickers:

Stock prices are dictated by expectations, and prices fluctuate as these expectations are affirmed or are proven to be unfounded. The most frequently followed measure of market expectations combines analyst projections for a company’s earnings into a consensus earnings estimate.

When a company reports actual earnings that differ from the consensus estimate, the difference is regarded as unexpected earnings. More commonly it is called an earnings surprise. During the earnings reporting season, which for most companies follows the end of their fiscal quarters in March, June, September and December, financial outlets provide daily reports on earnings announcements. Firms with significant earnings surprises are often highlighted in the media.

A positive earnings surprise occurs when actual announced earnings are above the consensus estimate. Negative earnings surprises take place when announced earnings are below the earnings expectations. Stocks of firms with significant positive earnings surprises tend to show above-average price performance subsequently, while those of firms with negative surprises tend to experience below-average price performance.

How Do You Judge an Earnings Surprise?

To say that a company missed or exceeded its consensus estimate for the quarter does not necessarily capture the true significance of such an event. There are several ways of measuring the significance of unexpected earnings. One of them is the percentage surprise. It is calculated by subtracting the consensus estimate by the actual earnings and dividing the difference by the consensus estimate.

For example, food producer Sanderson Farms Inc. (SAFM) reported second-quarter 2022 earnings per share (EPS) of $14.39 on May 27, 2022. This exceeded the consensus estimate for the period of $6.81 per share. The $7.58 per share positive earnings surprise represents a 111.3% surprise.

The formula is:

= (Actual EPS – EPS estimate) ÷ EPS estimate
= ($14.39 – $6.81) ÷ $6.81
= 1.113, or 111.3%

What Is the Standardized Unexpected Earnings (SUE) Score?

Another method of measuring the magnitude or significance of earnings surprises is with the standardized unexpected earnings (SUE) score. SUE measures the earnings surprise in terms of its number of standard deviations above or below the consensus earnings estimate.

An earnings surprise is considered more significant the farther it is outside the statistical range of estimates expected at the time of the announcement. Assuming a normal distribution of earnings estimates, 68.3% of actual earnings will be within one standard deviation of the consensus estimate, 95.4% will be within two standard deviations, and 99.7% will be within three standard deviations.

The absolute value of SUE measures the degree of unexpected earnings. When the SUE score equals zero, there is no earnings surprise; the actual earnings per share is in line with the consensus earnings estimate.

How to Calculate Standardized Unexpected Earnings

The SUE score is calculated by subtracting the estimated earnings per share from the actual earnings per share and dividing the difference by the standard deviation of the actual earnings from the consensus estimate.

Note that SUE scores are absolute values, meaning that they will never be negative. Studies indicate that stocks with higher SUE scores tend to exhibit stronger price reactions to earnings surprises than those with low SUE scores.

Another food producer, Simply Good Foods Co. (SMPL), reported quarterly earnings per share of $0.360 on April 6, 2022, for its fiscal quarter ending on February 28. The consensus estimate was $0.274 per share. The standard deviation of the estimates determining the consensus estimate was $0.030. Therefore, the calculation is as follows:

SUE Score

= (Actual EPS – EPS estimate)
÷ standard deviation
= ($0.36 – $0.274) ÷ $0.030
= 2.9

Where to Find Earnings Surprises

AAII members can see earnings figures for a company’s most recent quarter on the Charts tab of the Stock Evaluator. Enter a stock ticker in the search tool at the top of any AAII.com page and select the company from the list. Click on Charts, then select Earnings from the Events option and you’ll see a circled E added to the chart on the date of the earnings announcement. Hover over the circled E to bring up the earnings surprise details. Figure 1 shows the May 27 earnings data for Sanderson Farms. AAII members also have access to five earnings estimate revision screens, which often identify stocks with earnings surprises, at the Screening section of AAII.com.

FIGURE 1 Earnings Data on Stock Evaluator Chart

A+ Investor subscribers have access to the Grades tab, which includes an Estimate Revisions Grade. The grade is based on a score that takes into account the SUE score for the last two reported fiscal quarters as well as the change in the consensus estimate for the current fiscal year over the last month and three months. Figure 2 shows the SUE scores and percent revisions for Simply Good Foods and their resulting scores. The composite score of 72 puts Simply Good Foods in the B, or positive, grade range for estimate revisions. The Earnings tab of Stock Evaluator presents more in-depth data on actual earnings and consensus estimates over time for A+ Investors.

FIGURE 2 <a href=A+ Investor Scores" src="https://www.aaii.com/images/journal/17795-figure-2.jpg" style="width: 700px; height: 387px;" />

To screen on earnings revisions, A+ Investor subscribers can use the Custom Stock Screener. Filters include earnings surprise for the latest quarter, SUE for the latest quarterly earnings and estimate revision percentages for the current quarter and current year. Figure 3 shows sample results.

FIGURE 3 A+ Custom Stock Screener

How Long Does the Impact of an Earnings Surprise Last?

Changes in a stock’s price resulting from a positive or negative earnings surprise can be felt immediately, but the surprise can also have a long-term effect. While it may be difficult for individuals to buy on the initial surprise event, studies indicate that the surprise effect can persist for as long as a year after the announcement.

Therefore, it may not be prudent to buy a stock that has declined following a negative earnings surprise thinking it is now “attractively priced.” There is a good chance that the stock will continue to underperform the market for some time. Alternatively, it may not be too late to buy a stock that has seen its price jump following a positive earnings surprise.

Not surprisingly, the stock prices of larger firms tend to adjust to surprises faster than those of small firms. This is because the larger firms are tracked by more analysts and portfolio managers, who can buy and sell on news quickly.

Firms with an earnings surprise one quarter, either positive or negative, tend to have additional surprises in subsequent quarters. When a surprise signals a change in company fundamentals, management and analysts alike are typically slow to realize the strength and persistence of the change. As a result, company guidance and analyst estimates do not immediately reflect this change in fundamentals.

Discussion

BARRY J from TX posted over 4 years ago:

Good article. I feel like Penn and Teller just explained how a magic trick works. But how do I use this new trick to make money? Every earnings "season" I read articles about stock prices moving up or down because they met or missed the "consensus estimate" as THE rationale for the movement. I have NEVER seen any of these measures reported. Just the EPS and the amount of this miss versus the estimate. As Galileo said when his Inquisitors accused him of heresy for arguing that the Earth moved around the Sun, “Eppur si muove” (“And yet it moves).” The sources I monitor tell me which companies are going to report quarterly financials on a certain day ..as much as a week or a day in advance . As an "II" I rely on public sources (WSJ for example) to publish EPS data via email shortly after the company reports. By then the stock has already moved. Thus, I ask, what is the value of this article other than education to understand the mechanics of calculating EPS? Where would someone find EPS information ... in sufficient time to act on it ... if they choose? I suspect this type of "frontrunning" is illegal. Right? Add as Galileo would say after seeing the price change, “Eppur si muove.”


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: