What to look for

The market expects Bank of Montreal (BMO) to report a year-on-year decline in profits with lower revenues in its report for the quarter ending in April 2024. This well-known consensus outlook is important in assessing a company’s performance picture, but an important factor that can impact a company’s near-term share price is how actual results compare to estimates.

The earnings report, due on May 29, 2024, could help the stock climb higher if these key numbers are better than expected. On the other hand, if they miss, the stock could fall.

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

Zacks Consensus Estimate

The bank is expected to post quarterly earnings per share of $2.01 in its upcoming report, representing a year-over-year change of -6.9%.

Revenue is expected to be $5.96 billion, down 4.3% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has not changed over the last 30 days. 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.

The story continues

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 earnings growth, especially when combined 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 have the numbers changed for Bank of Montreal?

For Bank of Montreal, the Most Accurate Estimate is lower than the Zacks Consensus Estimate, suggesting that analysts have recently become bearish on the company’s earnings prospects. This resulted in an earnings ESP of -2.12%.

On the other hand, the stock currently sports a Zacks Rank of #4.

So this combination makes it difficult to confidently predict that Bank of Montreal will beat the consensus EPS estimate.

Does the history of surprising results have any clue?

When calculating future earnings estimates, analysts often consider how well a company has been able to match consensus estimates in the past. So it’s worth taking a look at the surprise history to gauge its impact on the upcoming issue.

For the last quarter, it was expected that Bank of Montreal would post earnings of $2.24 per share when it actually produced earnings of $1.90, delivering a surprise of -15.18%.

The company has failed to beat consensus EPS estimates in each of 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.

Bank of Montreal doesn’t seem like a compelling candidate to beat earnings. However, investors should also pay attention to other factors if they want to bet on or stay away from these stocks ahead of an earnings release.

Expected results of an industry player

Another Zacks Banks – Foreign Industry stock soon, Bank of Nova Scotia (BNS) is expected to post earnings of $1.14 per share for the quarter ended April 2024. These estimates indicate a year-over-year change of -8.8%. Revenue for the quarter is expected to be $6.11 billion, up 4.6% from the same quarter last year.

The consensus EPS estimate for Bank of Nova Scotia has been revised upwards by 0.6% over the last 30 days to the current level. However, the lower value of the most accurate estimate resulted in an earnings ESP of -1.53%.

This earnings ESP, combined with the Zacks Rank #3 (Hold), makes it difficult to confidently predict that Bank of Nova Scotia will surpass the consensus EPS estimate. The company has topped consensus EPS estimates twice over the last four quarters.

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

Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click to get this free report

Bank Of Montreal (BMO): Free stock analysis report

Bank of Nova Scotia (The) (BNS): Free stock analysis report

To read this article on Zacks.com click here.

Zacks Investment Research