Question

Chicago-based GrubHub, an online and mobile food-ordering service, reported third-quarter 2015 revenue jumped 38 percent and profits for the quarter grew 6 percent over the same period in 2014. Earnings per share remained steady at an adjusted 13 cents per share. However, the stock market analysts following the company, polled by Thomson First Call, were expecting earnings of 14 cents per share from revenue of $86 million. The company's stock price fell from 30 percent immediately after the earnings report was released. Earnings predictions are prepared regularly by analysts who closely follow companies and they are compiled by groups like Thomson First Call and Nelsons. Stock prices react to those predictions, and when they are not met, stock prices drop. To achieve or beat these expectations, companies often tell analysts that earnings will be lower than they really believe, or sometimes they use accounting discretion to boost reported earnings. How do analysts make earnings predictions, and what role do financial statements play? Also, please weigh in on what occurred with GrubHub and what contributed to the company’s stock price falling immediately after earnings were released? How would GrubHub be able to use financial ratio analysis to improve company results?

Answer 1

How do analysts make earnings predictions, and what role do financial statements play-

To predict earnings , most analyst build financial models that estimates prospective revenue and costs . To predict revenue , analyst estimate ales volume growth and estimate the price companies can charge for the products .

Consensus Earnings most common word while doing earning projection. Consensus earnings are far from actual but thay are watched by many investors and play an important role in measuring the appropriate valuation for a stock.

Consensus estimates of quarterly earnings are published for the current Quarter , the next quarter and so on for couple of quarter .

Many investor rely on earning performance to make their investment decisions . Stocks are assessed according to their ability to increase earnings as well as to meet or beat analyst consensus estimates

The basic measurement if earnings is earning per share . This metrics is calculated as the company’s net earnings or net income found on its Income Statement minus dividends of preferred stock , divide by the number of Outstanding shares

Earnings forecasts are based on analyst expectation of company growth and profitability

Many analyst will incorporate top down factors such as economic growth rate , currency impact , macroeconomic

Analyst forecast are critical because they contribute to investors valuation model.

Consensus estimates are so consistently tracked by so many stock market player that when a company misses forecast , it can send a stock tumbling ,

With so many investors watching consensus numbers , the difference between actual and consensus earnings is perhaps the single most important factor driving share price performance over the short term .

Also, please weigh in on what occurred with GrubHub and what contributed to the company’s stock price falling immediately after earnings were released?

Analyst was closely watch this company long time and they predict that Expected earnings of 14% per share from revenue of $ 86 Million . As discussed above , earnings per share is one of the major parameter / benchmark to decide company valuation , pricing and impact on stock market .

In real scenario, after published Quarter result , noticed that revenue jumped by 38% but profit for the quarter just grow 6% as compared with last year same Quarter . Earning per share steady at adjusted 13% per share .

Analyst expect earning per share would be 14% but in reality it was down by 1% and which have a good impact on market valuation .

Also in earning call , company mentioned that earnings will be lower than they really believe or sometimes they use accounting discretion to boost reported earnings.

The above sentence is very alarming for market while company mentioned that they used to do accounting discretion to boost reported earnings

All above negative factor badly impacted share market and share price shaprly decrease by 30% .

Eventhough company reported 38% revenue growth but operating expenses not under control and they able to maintain 6% only profit growth . Market as well as Analyst expect erning would be at least 10% along with maintain 14% earning per share .

How would GrubHub be able to use financial ratio analysis to improve company results?

GruvHub has to improve earning per share . Company has to maintain earning per share at least market analyst predicted number .

Company has to maintain operating Expenses like salary cost , Interest cost , depreciation expenses , control on collection as well as Inventory management , to avoid make any additional provision.

Company should not do any accounting discretion to boost reported earnings .