Earnings Season Forever Changed By Regulation FD

Earnings season is mostly done, so it’s fair to say this was a great reporting period. Usually I only have the stats on the percentage of firms beating estimates in the past 4 years. The chart below gives us more data to look at to further contextualize the beat rate. First, notice how since Regulation FD was passed, the beat rates have expanded. Before that set of rules, earnings season had misses and beats on the bottom line. Now it’s almost always beats. It’s amazing to see that even in 2008, more than half of firms beat results. It’s why you need to look at the historical trend of estimates to get a full picture of how firms are doing.

Regulation FD promotes fair disclosure so news comes out at the same time for everyone. Companies used to be able to meet with investors to discuss non-public information to get the investors to understand the narrative the company wants to promote. Now that it’s up to the marketplace to decide how the quarter was, firms try to make sure earnings beat estimates to make themselves look good. It’s not always that easy as the stocks of firms which beat estimates don’t always rise. There’s more to evaluating a business than just looking at if the EPS number beat expectations because they can be manipulated. Firms can utilize buybacks to boost EPS to report the number needed. They also get expectations lowered to make a bad result look good like putting lipstick on a pig.

The manipulation of estimates and the use of buybacks to get EPS to beat estimates doesn’t work well for revenues, making topline growth a better representation of the truth. As you can see from the chart below, the revenue results were more impacted by changes in the economy than EPS results. It’s not always sunny skies as recessions and moderate slowdowns have caused revenues to miss estimates. Now that I made the point about how earnings and revenue surprises work, look at the latest quarter’s results. As you can see from the chart above, the earnings beat rate was the 5th best this expansion as 74% of S&P 500 firms beat estimates. The revenue beat rate was 57% which is tied for the highest beat rate since Q1 2011.