Whisper Number Impact: Apple Expectations Show Confidence

Apr.23.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) reports fiscal second quarter earnings on Tuesday, April 24th, after market close. The whisper number is $10.48, 48 cents ahead of the analysts estimates. Apple has exceeded the whisper number in 41 of the 55 earnings reports we have data.

Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Apple presents an earnings trade opportunity.

Since Apple reports earnings after market close, it's important to look at after hours trading activity. Over the past four quarters the average price move in after hours trading following earnings reports is 3.9%, a decent and positive price move. In other words if you took a long position prior to the past four earnings reports you were on the right side of the trade in three out of four trades.

The average price move during next available intra-day trading (market open to market close) for the past four quarters is -1.3%, a limited and negative price move. The average price move within five trading days for the past four quarters following its earnings reports is -1.6%, a limited and negative price move. So you gave back some overnight gains in the next five trading days.

Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of -0.7% (intra-day) in one trading day following their earnings report, -0.9% in five trading days, -1.0% in 10 trading days, -1.5% in 15 trading days, and -4.2% in 20 trading days.

Apple has topped the whisper number in three of the past four quarters, and short term they've seen a consistent price reaction. In other words, beating the whisper number showed price strength, and missing the whisper number showed price weakness. The average price move in 30 days when beating the whisper number is 6.7%, while the average price move in 30 days when missing the whisper number is -3.4%.

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Two quarters back (October 2011) was the first time Apple reported earnings short of the whisper number in five years. Within 20 trading days (from open) of that report the stock dropped 4.2%. Add that to the after hours drop of 4.9%, and the stock was down a total of 9%. A miss this quarter could translate to similar price movement.

When considering all quarters for which we have a whisper number, the best time frame for positive returns falls at the 30-day mark. The 30-day price reaction for the 41 quarters that Apple has topped the whisper shows an average price move of 4.2%. And for the 13 quarters it has missed the whisper number, an average price move of 8.2% in 30 trading days following earnings.

Other factors that may influence post earnings price movement ...

The majority of investors polled are expecting the company to provide a negative outlook:

  • Positive 33.3%
  • Neutral 0.0%
  • Negative 66.6%

Compare this to last quarter's expected outlook:

  • Positive 50.0%
  • Neutral 50.0%
  • Negative 0.0%

Apple has a 75% positive surprise history (having topped the whisper in 41 of the 55 earnings reports for which we have data).

  • Beat whisper: 41 quarters
  • Met whisper: 1 quarter
  • Missed whisper: 13 quarters

The whisper numbers have proven more accurate than analysts estimates as well. Over the past 21 quarters the whisper number has been closer to the actual earnings in 20 of 22 quarters. The current "high" expectation is 13.00, while the current low expectation is 9.85.

Summary: Over the past four quarters Apple has topped the whisper number by an average of $1.50. The current whisper number is well above the analysts' estimate, showing some confidence from investors. The key to playing Apple earnings, however, is the expected price reaction. Historically the after hours move is positive, averaging 3.9%. The stock tends to give up ground over the next 10 to 20 trading days, but the move is very limited (around -1.0%). The stock then sees strength through 30 days (averaging about 6%).

More post earnings price movement and historical data can be found here.

What are your earnings expectations? Let us know in the comments section below or visit whispernumber.com.

When analyzing the data collected by WhisperNumber.com, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what time frame (see link in profile to receive alerts).

Since 1998, WhisperNumber.com has been tracking and publishing "crowd sourced estimates" for earnings. Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

A company's "reaction" to the whisper number expectation is the key - on average companies that exceed the whisper are "rewarded," while companies that miss are "punished" following an earnings report.

According to the Wall Street Journal, "the percentage of companies that have beaten expectations often is cited as a barometer of corporate profitability, an indicator of how well the economy as a whole is doing or a predictor of where the stock market is going. What goes unsaid, however, is that these positive surprises are becoming so common they are nearly universal. They are predetermined in a cynical tango-clinch between companies and the analysts who cover them. And there is no reliable evidence that the stock market as a whole will earn higher returns after periods with more positive surprises."

"In short, there isn't anything surprising about earnings surprises. They aren't the exception; they are the rule. "'All the numbers are gamed at this point,'" says James A. Bianco, president of Bianco Research."

Whisper numbers provide the unbiased earnings expectation proven more significant than the analysts estimates.

All trading involves risk and the information presented is not intended to be a recommendation of any kind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.