Could shares rise?

The market expects year-over-year credit approval (CACC) to deliver a decline in earnings on lower revenues when it reports earnings for the quarter ended December 2022. This well-known consensus outlook is important in assessing the company’s earnings picture, but the most important factor that may have an impact on the company’s short-term share price, is to compare actual results with estimates.

Shares could rise if these key numbers beat expectations in the upcoming earnings report. On the other hand, if not, the stock could fall.

While management’s discussion of business conditions on the earnings call will largely determine the sustainability of the immediate price change and future earnings expectations, it is worth having some insight into the likelihood of a positive EPS surprise.

Zacks Consensus Estimate

The auto finance company is expected to post quarterly earnings of $7.71 per share in its upcoming report, representing a year-over-year change of -47.2%.

Revenue is expected to be $436.42 million, down 5.8% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has been revised upwards by 5.71% over the last 30 days to the current level. This broadly reflects how analysts covering the data have collectively re-evaluated their initial estimates during this period.

Investors should note that the direction of each analyst’s estimate revisions will not always be reflected in the aggregate change.

Whisper about earnings

Revisions to estimates prior to a company’s earnings release provide an indication of business conditions in the period in which the earnings are expected to be released. Our proprietary surprise prediction model, the Zacks Earnings ESP, is based on this insight.

The Zacks Earnings ESP compares the Most Accurate Estimates to the Zacks Consensus Estimates for the quarter; The Most Accurate Estimate is a newer revision of the Zacks Consensus EPS estimate. The idea is that analysts reviewing their estimates just before an earnings release have the latest information, which could potentially be more accurate than what they and other consensus participants had previously predicted.

Thus, a positive or negative ESP reading theoretically indicates the likely deviation of actual earnings from consensus estimates. However, the predictive power of the model is only significant for positive ESP readings.

A positive Earnings ESP is a strong predictor of an earnings beat, especially when paired with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks in this combination deliver a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of its Earnings ESP.

Please note that a negative earnings ESP reading does not mean a loss of earnings. Our research shows that it is difficult to predict earnings growth with any degree of confidence for stocks with negative ESP readings and/or a Zacks Rank of 4 (Sell) or 5 (Strong Sell).

How did the loan approval numbers shape up?

In the case of Credit Acceptance, the Most Accurate Estimate is higher than the Zacks Consensus Estimate, suggesting that analysts have recently become bullish on the company’s earnings prospects. This led to an Earnings ESP of +25.55%.

On the other hand, the company’s stock currently has a Zacks Rank of #2.

Thus, this combination indicates that loan approval is likely to exceed the consensus EPS estimate.

Does the history of surprising results hold any clue?

When calculating a company’s future earnings estimates, analysts often wonder how well it was able to match previous estimates. So it’s worth taking a look at the company’s surprise history to assess its impact on the upcoming number.

For the last reported quarter, Credit Acceptance was expected to post earnings of $11.37 per share when it actually produced earnings of $6.49, delivering a surprise of -42.92%.

The company has beaten consensus EPS estimates twice over the last four quarters.

Bottom Line

Improving or lacking earnings may not be the only basis for a stock’s value rising or falling. Many stocks lose value despite good earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite losing profits.

That said, betting on stocks that are expected to exceed earnings expectations increases your chances of success. Therefore, it is worth checking the company’s Earnings Rank and Zacks Rank before their quarterly release. Use our Earnings ESP filter to find the best stocks to buy or sell before they report.

Credit Acceptance appears to be a compelling candidate for improved financial performance. However, investors should pay attention to other factors when betting on these stocks or staying away from them ahead of the earnings release.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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