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S&P 500 Companies Seeing Best Price Reaction to Negative EPS Guidance in Four Years

Earnings

By John Butters  |  March 22, 2019

At this point in time, 105 companies in the index have issued EPS guidance for Q1 2019. Of these 105 companies, 77 have issued negative EPS guidance and 28 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 73% (77 out of 105), which is above the five-year average of 70%.

Given the above-average negative sentiment in EPS guidance, how has the market responded to negative EPS guidance issued by S&P 500 companies for the first quarter?

Companies in the S&P 500 that have issued negative EPS guidance for Q1 have seen an increase in price of 0.8% on average from two days before the company issued guidance through two days after the company issued guidance. Over the past five years, companies in the S&P 500 that have issued negative EPS guidance have witnessed a -0.5% decrease in price on average during this four-day window.

It is not unusual to see an average positive price reaction when companies have issued negative EPS guidance. In eight of the past 20 quarters, companies that have issued negative EPS guidance have seen a positive price reaction on average. However, if the final percentage for the first quarter is 0.8%, it will mark the highest average positive price reaction to negative EPS guidance during this four-day window since Q1 2015 (+1.8%).

Of the 77 S&P 500 companies that have issued negative EPS guidance for Q1, 46 (or 60%) recorded an increase in price over this four-day period. An example of one of these companies is Hanesbrands. On February 7, Hanesbrands issued (adjusted) EPS guidance for Q1 2019 of between $0.24 and $0.26. The mid-point of this range ($0.25) was below the mean EPS estimate of $0.28. However, from February 5 through February 11, the price of the stock increased by 17.9% (to $18.39 from $15.60).

It is interesting to note that S&P 500 companies that have reported negative EPS surprises (actual EPS below the mean EPS estimate) for the fourth quarter have  witnessed the smallest negative price reaction (-0.7%) on average (over this four-day window) since 2009. Please see our previous article on this topic for more details, S&P 500 Companies See Best Price Reaction to Negative EPS Surprises in Nine Years.

Companies often issue EPS guidance for the current quarter on the same day they report actual results for the previous quarter. The market clearly reacted more positively than normal to both negative (and positive) EPS surprises for Q4 and to negative (and positive) EPS guidance for Q1 during the months of January and February.

The term “guidance” (or “preannouncement”) is defined as a projection or estimate for EPS provided by a company in advance of the company reporting actual results. Guidance is classified as negative if the estimate (or mid-point of a range estimates) provided by a company is lower than the mean EPS estimate the day before the guidance was issued. Guidance is classified as positive if the estimate (or mid-point of a range of estimates) provided by the company is higher than the mean EPS estimate the day before the guidance was issued.

S&P 500 EPS guidance versus average price change percent

S&P 500 negative EPS guidance average price change

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John Butters

Vice President, Senior Earnings Analyst, Investor Relations

Mr. John Butters is Vice President and Senior Earnings Analyst at FactSet. His weekly research report, “Earnings Insight,” provides analysis and commentary on trends in corporate earnings data for the S&P 500 including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, The Financial Times, The New York Times, MarketWatch, and Yahoo! Finance. Mr. Butters has over 15 years of experience in the financial services industry. Prior to FactSet in January 2011, he worked for more than 10 years at Thomson Reuters (Thomson Financial), most recently as Director of U.S. Earnings Research (2007-2010).

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