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Beat, Raise and Still Drop: An Earnings Reaction Course · Lesson 2 of the course

Reading Earnings Guidance: Ranges, Midpoints and Raises

Earnings guidance arrives as a range. Set its midpoint and both ends beside the previous range and the analysts' consensus, and a headline raise can turn out to sit below what the market expected.

AI-assisted, reviewed by the Just The Markets human editor: Beth Rue → About 13 minutes Published

  1. 01What an Earnings Release Reports and What It Is Measured Against
  2. 02Reading Earnings Guidance: Ranges, Midpoints and Raises
  3. 03The Earnings Implied Move and the Size of the Reaction
  4. 04Post-Earnings Drift, Gaps and Rechecking a Position

In this lesson you will learn to

  • Work out the midpoint of a guidance range and the size of a raise at the midpoint and the ends
  • Compare a new guidance range with consensus and say whether the raise meets expectations
  • List the reasons a raise can still send a stock lower

“Raising full-year adjusted EPS guidance to $4.05 to $4.35, from $4.00 to $4.20.” That’s the line in a hypothetical company’s release. It reads like good news, and the headline writers will call it a raise, but the stock falls in after-hours trading anyway, and every number needed to see why is already in that sentence and on your quote page.

Guidance comes as a range

Companies that give guidance usually give a range for revenue, EPS or both, for the next quarter or the full year. A range lets management be right across a spread of outcomes. It also leaves you to decide which part of the range to read.

Start with the midpoint. It’s the average of the two ends and the figure most analysts line up against consensus. Then check each end on its own. The low end is the worst case management is willing to print, and the top end is what they would call a great year.

Measuring the raise

The range also got wider. It was 20 cents across and it’s now 30. Most of the raise sits at the top, where it costs management least to be wrong, while the floor moved up by 5 cents, so the fair reading is that the company sees more room for a good year without being much surer the bad case is off the table.

Against consensus

Now bring in the number the market was holding. Suppose consensus for the full year was $4.25.

The raised midpoint of $4.20 is still 5 cents below it, about 1.2% short. So the company raised, and the market hears a miss. Analysts who had $4.25 in their models now see management guiding to less than that, and they may trim their estimates toward the range.

Beat, raise and still drop usually looks like this. Consensus had already moved above the old range, often because the company has a habit of guiding low and beating, and the raise didn’t catch up.

Why a raise can disappoint

Several patterns turn a raise into a drop:

  • The new midpoint sits below consensus, as in the example.
  • The raise is smaller than the quarter’s beat.
  • The floor barely moved.
  • Next quarter’s guidance came in light while the full year went up.
  • EPS guidance rose but revenue guidance didn’t.

The second one catches people. If a company beats the quarter by 10 cents and raises the full year by 10 cents, it has kept the rest of the year exactly where it was, which is a flat outlook for the remaining quarters dressed up as a raise. A company that beats by 10 cents and raises by 5 has cut the rest of the year.

The reverse happens too. A company can hold its guidance and see the stock rise, if consensus had drifted below the range and the report reassures the market. And a real cut is its own subject: the walkthrough on how stocks react when a company cuts guidance covers it, and a company that warns before the scheduled date is making an earnings pre-announcement.

Guidance habits

Some management teams set ranges they expect to beat. Others aim for the middle. A company’s history of guidance against its results shows which, and that habit is already in consensus, so it pays to know it before the release.

After the report, analysts move toward the new range, and the pattern shows up in earnings estimate revisions. The earnings hub has more on how estimates settle after a report.

Guidance sets the direction of the surprise. The next lesson puts a size on the likely reaction with the earnings implied move, read straight off the option chain before the report.

Check your understanding

Lesson quiz

  1. 1Guidance moves from $2.00 to $2.20 to a new range of $2.10 to $2.30. How much did the midpoint rise?
    Show the answer

    B: 4.8%. The midpoint goes from $2.10 to $2.20, a rise of $0.10 on $2.10, which is 4.8%. The 5.0% answer divides by the low end of the old range.

  2. 2A company raises its full-year EPS midpoint to $4.20. Consensus is $4.25. How is the raise likely to be read?
    Show the answer

    A: As falling short of what analysts already expected. The raised midpoint still sits $0.05 below consensus, so against expectations the new outlook is a small miss even though it went up.

  3. 3An old range of $3.00 to $3.20 becomes $3.00 to $3.40. What changed at the low end?
    Show the answer

    B: Nothing: it stayed at $3.00. The floor did not move. The raise is all at the top, and 3.2% is the midpoint change from $3.10 to $3.20.

People also ask

Why would a stock fall after a company raises guidance?

The raise is judged against consensus, and consensus often already sits above the old range. If the new midpoint lands below it, or the low end barely moves, or the raise is smaller than the quarter's own beat, the market reads the outlook as weaker than it hoped for.

Should you use the midpoint or the low end of guidance?

Use both. The midpoint is the figure analysts usually compare with consensus. The low end shows the worst case management is willing to put in writing, so a raise that leaves the floor almost where it was says less about confidence than the headline suggests.