By Rosy Bitar, Head of Company Financials Data, and Brandon Emmerich, Technical Product Manager, at Bloomberg.
Among Covid-19’s widespread effects, the virus has thrown a wrench into a vital process within the financial markets: the disclosure of company data that investors use to inform their positions and trades. The pandemic has altered publicly traded companies’ disclosure patterns, complicating investors’ abilities to find actionable signals from financial data.
During the pandemic’s early days, companies racked by virus-induced uncertainty shifted from disclosing timely fundamental financial numbers and guidance forecasts to releasing partial figures sporadically. In addition, the language companies used in communications for filings and on conference calls largely obscured Covid-19’s direct or longer-term effects on their operations.
Furthermore, broker analysts, lacking data that illuminated Covid-19’s true impact on businesses, could not revise their estimates of companies’ future financial results in a timely manner, eroding another valuable information source that investors tap. Collectively, these changes forced analysts, quants and traders to perform their analyses, build their models and make decisions using significantly less information than usual during a particularly volatile period.
Amid this shift in disclosure patterns, data providers have adapted, devising novel ways to interpret textual information. They have been able to aggregate new or incomplete disclosure data sets, standardize them and convert them into signals that investors can use.
Pre-Coronavirus, data were timely
Timely financial data has always played an important role in the investment process. Pre-Covid-19, publicly traded companies disclosed their full earnings data roughly two weeks to two months after the quarter closed, depending on the report components, regulatory regime and industry. Alongside these numbers, companies released guidance on future forecasted fundamental data that looks ahead at least one quarter.
Typically, broker analysts submitted estimates for quantitative company-reported metrics such as revenues or earnings per share in advance of an earnings release. Once businesses announced earnings, analysts began publishing estimates for future periods.
Investors often considered these estimates timely and relevant even 100 days after they’re published so long as nothing significant happens in the interim. The impact of Covid-19, a major macro event by any measure, upset this process.
Companies limit disclosure and guidance
Last March, the pandemic’s arrival immediately sowed disruption and uncertainty in companies’ businesses. As Covid-19 spread, some corporations responded by withdrawing their guidance and delaying their quarterly financial data.
Many companies altered their earnings date, or the time of the earnings release date, Bloomberg numbers show. During the first three months of 2020 peak reporting, almost 30% of companies delayed releasing their earnings by at least five days; by the end of the second quarter, this number declined to 17%.
What’s more, some corporations started disclosing only fragments of data. For example, instead of releasing full results, they would only post sales. In some cases, they would make some numbers public and let weeks pass before providing more.
Complicating matters for investors, corporations withdrew guidance on future earnings, and other, data. In 2020, more than 1,750 companies globally withdrew their guidance, according to Bloomberg numbers. This compares with only 59 over the previous four years combined. In 2020, 400 North American companies pulled their guidance, compared with just two in 2019.
Some companies also invalidated any recent guidance they provided. A number of investors regard this guidance withdrawal itself as a signal that could inform investment decisions.
In the face of sustained uncertainty, other companies have been providing incomplete guidance, such as projected earnings-per-share, but not net revenues.
As the pandemic’s effects reverberated, many companies struggled to ascertain and communicate Covid-19’s true impact on their operations and earnings. In many cases, companies described the effects textually, explaining that the pandemic has caused no impact on operations; a total shutdown of operations; or varying degrees of impact on operations.
Finally, broker analysts navigated earnings seasons under Covid-19 without sufficient information to construct estimates of corporations’ future financial results. Consequently, fewer analysts were able to make comprehensive or timely estimates that investors can use.
Data providers adapt for the times
Data providers adapted to unearth signals on which investors can trade from companies’ textual content, or no content at all. Providers have been standardizing communications by translating textual information on Covid-19’s operational impact on companies in ways that provide more clarity for investors.
For example, it’s been possible for some providers to translate textual content in filings and on conference calls into one of seven fields: benefit; no impact; no material impact; material impact; total disruption; unknown impact; and no disclosure.
This technique has enabled investors to screen for all companies that announced, say, a total shutdown of operations. In addition, more companies affected by the pandemic have started to release additional information over time—in ways that more clearly articulate Covid-19’s impact on operations over a longer term. This has proven more helpful for investors who are screening for hundreds of companies or in an index; finding new investment opportunities; or deciding among options for companies they already hold.
Providers have also been applying data extraction and normalization to other fields that capture a metric of impact: charges. Investors have been screening for Covid-19 charges pretax; Covid-19 charges per share; and Covid-19 charges operating net income. Other sector-related fields include the percentage of stores closed due to Covid-19 and Government funds received for companies eligible for grants and funding.
Covid-19, as a macro event, changed consensus management of broker analyst estimates, particularly through the first two quarters of the pandemic. As the coronavirus affected company fundamentals, analysts awaiting more information delayed releasing their estimates, reducing the number of current estimates used in consensus reports.
Favoring recency, data providers valued those analyst estimates received closest to quarterly reporting times. Providers helped investors by changing their own consensus thresholds to strip out laggards.
Macro events such as the Covid-19 pandemic will come and go, but analysts, quants, traders and other investors will continue to parse publicly traded companies’ financial data for actionable signals. When companies restrict access to those numbers for any reason, investors will find themselves relying more heavily on data providers, particularly those that can adapt quickly as disclosures change, to help fill in the blanks.
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