Bank of America (BAC.US) is set to report its third-quarter financial results on October 15th, Eastern Time. The market expects an increase in revenue, but a year-over-year decline in earnings. According to Zacks Consensus Estimate, the second-largest U.S. bank is projected to have a Q3 revenue of $25.33 billion, a year-over-year increase of 0.7%. The earnings per share (EPS) are expected to be $0.78, a year-over-year decrease of 13.3%.
This widely recognized general expectation is crucial for assessing the company's performance prospects. However, a significant factor influencing its near-term stock price may be the comparison with the actual results. If the results exceed expectations, the release of this earnings report may drive the stock price higher. If they fail to meet expectations, the stock performance may decline.
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Although the discussion of business conditions by management during the earnings call will primarily determine the current price changes and the sustainability of future earnings expectations, it is still worthwhile to have a favorable insight into the possibility of a surprise in earnings per share.
Looking at the trend of expectation adjustments, over the past 30 days, the EPS estimate for this quarter has been revised downward by 3.52%. This essentially reflects the trend of analysts covering the stock collectively revaluing initial estimates during this period. However, overall changes may not always reflect the direction of individual analysts' revisions to expectations.
Analysts who revise expectations before the earnings release may have access to the latest information or provide clues for forecasting the business conditions of this period, and their predictions may be more accurate than those of analysts who formed the consensus expectation together. The Zacks Earnings ESP forecast model takes this factor into account, and some studies have shown that a positive earnings ESP combined with a Zacks Rank of 1 (Strong Buy), 2 (Buy), or 3 (Hold) results in stocks with this combination producing positive surprises nearly 70% of the time.
For Bank of America, the "most accurate" recent expectations are below the Zacks Consensus Estimate, indicating that analysts have recently begun to take a bearish view on the company's earnings prospects, resulting in an ESP earnings of -1.36%. On the other hand, the stock's current Zacks Rank is 3rd.
Therefore, considering these factors, it is difficult to conclusively predict that Bank of America's earnings per share will exceed the general expectation.
So, can the history of earnings surprises provide clues? When calculating expectations for a company's future earnings, analysts usually consider how well the company has met past general expectations. In the second-quarter earnings report, the market expected Bank of America's EPS to be $0.79, while the actual earnings were $0.83, exceeding expectations by 5.06%. Over the past four quarters, the company's EPS has exceeded the market's general expectations four times.
Furthermore, the level of profitability may not be the only basis for stock price fluctuations. Given other factors that disappoint investors, many stocks may still decline despite exceeding earnings expectations. Similarly, some unexpected catalysts have helped some stocks rise even when earnings fell short of expectations. However, that being said, betting on stocks that are expected to exceed earnings expectations does indeed increase the chances of success.
Compared to peers, as a major participant in the U.S. banking industry - major regional industry stocks, the market previously expected JPMorgan Chase (JPM.US) to have a Q3 revenue of $41.01 billion, a year-over-year increase of 2.9%, and EPS of $4.02, a year-over-year decrease of 7.2%. The earnings report data announced last week showed that the bank's Q3 revenue was $42.65 billion, a year-over-year increase of 7.0%; EPS was $4.37, both exceeding the market's general expectations.Prior to this, JPMorgan Chase's consensus expectation for earnings per share (EPS) has been revised downward by 1.1% over the past 30 days to the current level. However, the "most accurate" recent expectations are relatively higher, resulting in an Earnings Surprise Predictive Score (ESP) of 0.39%. Combined with Zacks' Rank #3 (Hold) rating, it is predicted that the bank's EPS is highly likely to exceed expectations. In addition, the company has exceeded the market's consensus expectations for EPS in each of the past four quarters.