Apple and the significance of the “whisper” number

“Whisper” numbers in the US ahead of results are very important as investors discount analyst estimates well in advance of the reports. The closer you get to thr announcement, a whisper number generally does the rounds and is the real benchmark that the actual results are anchored to. At the moment, none is more important for the wider market in general than Apple. There is a big move ahead tonight given the prevailing sentiment in the stock at present that is very much bearish. Should Apple beat whisper number by a decent margin and guidance be positive/details be unveiled re an increased share buy back then expect fireworks to the upside – possibly as high as $580 in the days ahead – site of a gap to fill.

Should the numbers/guidance fall short then either a double bottom just shy of $480 looks to be in the cards or a move down to $450 – if the latter then expect a bounce in the days ahead as fundamentally focused funds buy up the stock on around 7 times ex cash.

Apple reports fiscal first quarter earnings on Wednesday, January 23rd, after market close. The whisper number is $13.68, twenty-six cents ahead of the analysts estimates. Whisper numbers range from a low of $12.50 to a high of $14.23. Apple has a 72% positive surprise history (having topped the whisper in 42 of the last 58 earnings reports).

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 their earnings reports is +2.4% (down from +3.2% last quarter), and over the past eight quarters the average price move in after hours trading following their earnings reports is +3.0% (up from +2.4% last quarter). 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 two out of four trades, and if you took a long position prior to the past eight earnings reports you were on the right side of the trade in five out of eight trades

The average price move during next available intra-day trading (market open to market close) for the past four quarters is -0.7%, a limited and negative price move. The average price move within five trading days for the past four quarters following their earnings reports is -0.7%, a limited and negative price move. So Apple gives back some overnight gains in the five trading days following earnings.

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, -0.6% in five trading days, -0.6% in ten trading days, +0.2% in fifteen trading days, and +0.2% in twenty trading days.

Apple topped the whisper number in January 2012 by $3.65, and again in April 2012 by $1.81. They fell short of the whisper number in October 2011 by $0.54, missed again in July 2012 by $1.70, and missed last quarter by $0.31.

October 2011 was the first time Apple reported earnings short of whisper number in five years. Within twenty 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%.

Apple missed again in July 2012, but the price reaction was much different. Within twenty trading days (from open) of that report the stock gained 16.3%. Take away the after hours drop of 4.3%, and the stock still realized a positive move of 12%.

When Apple missed the whisper number last quarter, the stock remained flat in after hours trading, but has since fallen over one-hundred points (a 17% loss).

When considering all quarters for which we have a whisper number, the best timeframe for positive returns falls at the thirty day mark. The 30-day price reaction for the forty-two quarters that Apple has topped the whisper shows an average price move of +3.9%. And for the 15 quarters it has missed the whisper number, an average price move of +8.3% in thirty 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 positive outlook:

– Positive 60.0%
– Neutral 40.0%
– Negative 0.0%

Compare this to last quarter’s expected outlook:

– Positive 66.7%
– Neutral 0.0%
– Negative 33.3%

As indicated earlier, Apple has a 72% positive surprise history:

– Beat whisper: 42 qtrs
– Met whisper: 1 qtrs
– Missed whisper: 15 qtrs

The whisper numbers have proven more accurate than analysts estimates as well. Over the past twenty-five quarters the whisper number has been closer to the actual earnings in 21 of 25 quarters.

Summary: Over the past four quarters Apple has topped the whisper number twice. The current whisper number is above the analysts estimate, showing confidence from investors. The key to playing Apple earnings, however, is the expected price reaction. Historically the after hours move is positive, averaging +2.4% to +3.0%. The stock tends to give up ground over the next ten to fifteen trading days, but the move is very limited (around 1.5%). The stock then sees strength through thirty days (averaging about 4%). These averages are trending lower due to the recent price weakness.