What to Look For in Quarterly Earnings

Today, I want to talk about what are some indicators of positive performance from a quarterly (or annual) earnings release from a company. Because results are dependent on industry, i.e. you would look for different things when evaluating a bank versus a retailer, I will try to keep this as top level and universal as possible. Through some later writing, especially as I dive into some earnings takes that I used to do back in the day for the banks that I covered, I’ll further explore some of the industry-specific things that companies talk about in earnings releases.

One way to know what is important for an individual stock’s performance – at least in the eyes of the company – is to look at what is highlighted in its earnings releases. It can help you to understand what kind of impact the actual results are going to have on the performance of the stock. This is the information that analysts will use when examining the company and what will dictate their ratings and predictions for the company. It’s really up to an individual investor whether they want to take the analysts’ views as gospel regarding the future potential of a company. Personally, I don’t pay much attention to individual analyst results, though the number of analysts that follow a company can indicate the “importance” of the company to the market.

There are two separate sources for earnings results from the company. Some companies only release a press statement with their annual report – Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B) comes immediately to mind – but most companies will release a press release times with the filing of their 10-Q every quarter. The press release will highlight all the important things that a company wants to tell its investors (and the analysts that follow them), so it is definitely information presented with a definite bias. If you are not intimidated by accounting reports and lawyer speak, however, I would urge you to dive into the actual 10-Q/10-K when available from the SEC.

The press release tends to highlight all the important metrics that the company thinks are important: revenue, net income, earnings per share, and typically comparison to the same quarter during the previous year. They also include language from the CEO and/or CFO highlighting those numbers and often giving an outlook for the remainder of the fiscal year or, in the case of an annual report, the next fiscal year. This helps signal to investors and analysts what to expect from the company, and a positive report often results in positive results for the stock and vice versa.

Take for example Under Armour (NYSE: UA, NYSE: UAA). They announced results from 2017 back in February. They highlighted both the results from the 4th quarter – “Revenue was up 5 percent [over the 4th quarter of 2016] to $1.4 billion” – and the entire year – “Revenue was up 3 percent [over all of 2016] to $5.0 billion” – and covered all the metrics that they deem important. Beyond revenue, they also discussed gross margin (and adjusted gross margin); selling, general, and administrative expenses; restructuring and impairment charges (which should be irregular expenses); operating (and adjusted operating) income/loss; net loss (a loss of $88 million for the fourth quarter pushed the annual income to a loss), and diluted earnings per share. They also went into detail about the company’s restructuring, and provided a full year outlook for 2018, as well as extracts from the company’s financial reports. This was a pretty standard earnings report for a company like Under Armour.

As to whether this was considered a “good” report or a “bad” report, we can take a look at the immediate performance of the stock after the earnings were released. Since investing should be based more on where a company will be in the future, the larger impact was probably felt from the company’s outlook for 2018, rather than what the company had done over the past year. The earnings were released before the market opened on February 13.

The previous day, Under Armour shares – using ticker UAA, which are the Class A shares in Under Armour dual-class share structure – closed at $14.23 a share. Before the market had opened the next morning, shares had already climbed to $16.15 a share, and ended the day at $16.70, and increase of over 17%. This is a solid indicator that the market – investors and analysts alike – thought the 2018 outlook for Under Armour made it a worthy investment, or at least a better option than they were prior to the announcement.

Obviously, earnings are not the only thing that will impact the performance of a stock. Otherwise, shares would only be traded on the days surrounding the release of earnings for every company. But earnings releases are a regularly scheduled opportunity for a company to let investors know what is going on with the company. Last week, Under Armour announced that it will release its first quarter results on May 1 before the market opens, so interested parties will know that they can check back in and see if Under Armour still believes it is on the trajectory for 2018 that they projected with their annual report in February. This should have an impact on the performance of the stock, and it remains to be seen what that will be.

An “earnings miss” is usually based on what the analysts think, though lightly followed companies may be judged against their own personal estimates. For example, Under Armour is projecting earnings per share between $0.14 and $0.19 for the full year of 2018. Analysts have decided, on average, that the high number of the range will be the result, projecting $0.19 per share for the entire year. They also have estimated quarterly earnings for the first two quarters of the year, so when Under Armour releases first quarter earnings on May 1, the earnings (and revenue) will be compared to those estimates, resulting in headlines announcing “an earnings beat/miss for this sportswear giant.”

I hope that this article has provided an adequate overview of examining company earnings. As I stated, the best way to know what is important is to see what the company highlights. Look over previous press releases to see how things have changed, including projections for future quarters and years. Tomorrow, I will dive into what kind of information you would want to see before deciding to buy – or sell – a stock based on the financial performance of the company.

Until next time…

Disclosure: My mother owns shares of Berkshire Hathaway in a portfolio I manage. Please see my full disclosure page.

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