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Earnings Season

By Terry Savage on July 31, 2019

It’s “earnings season” again – the quarterly period when public companies report their profits, and more.  Both anticipation and results impact stock prices.  Some companies “disappoint and some “beat” expectations.  Unless you’re a seasoned investing pro, the frenzy over corporate earnings reports may leave you a bit confused.  Here are the basics, and some definitions:

Quarterly Earnings.  Every publicly traded company is required to report its financial results on a quarterly, and annual, basis.  Since most companies’ accounting systems are on a calendar quarter, they will start reporting their results shortly after the quarter ends on March 31, June 30, September 30, and December 31st.  The company announces its reporting date in advance.  They must file between 35 and 60 days after the end of the quarter, and year-end.

Each earnings report includes the company’s financial information such as sales or gross receipts, operational expenses, and net profits.  Of course, larger companies have more of everything – from revenues to profits.  So, to make comparisons easier, companies report profits on a “per share” basis.  That is, the overall profit is divided by the number of shares outstanding to get EPS – earnings per share.  That makes it easier to compare companies in the same industry, and for investors to track profit trends. Plus, that EPS number is used to compute a PE Ratio — the ratio of stock price to earnings per share. It’s another handy tool for comparing stock valuations.

The earnings reports are filed with the SEC.  The quarterly report is called the “10-Q” and the annual report is called the “10K”.   They are available each company’s website under their “financials” section, and in searchable form at the SEC website.  When the report is filed, each company issues a press release, detailing the highlights of the earnings report.  As well, the CEO (chief executive officer) and CFO (chief financial officer) typically participate in an “earnings conference call” with securities analysts who follow the company and ask tough questions.

Earnings Anticipation.  There is a huge army of “security analysts” that work for private research firms and major brokerage firms.  They use their best skills to try to anticipate a company’s earnings report.  They may visit stores to see how well product is selling, or check the company’s employee parking lot to confirm business is so good they added a third shift!

But analysts cannot use “inside information” from someone in the company; that’s strictly illegal!  Some companies issue “progress reports” of important numbers during the quarter, such as weekly or monthly sales figures.  But any company information must be released publicly to all analysts at the same time.

As part of the analyst calls, the companies also may offer “guidance” or general forecasts of what to expect from future earnings.  You’ll see headlines after those earnings conference calls, saying the CEO is a bit worried about something or other – from the impact of trade and tariffs to consumer behavior or other factors that may impact the business.  The analysts factor this guidance into their forecasts.  Companies give guidance because they don’t want analysts to be terribly off-track in their earnings estimates, leading to big surprises.

Where can you find those forecasts?  A website called WhisperNumber.com tracks analysts’ earnings forecasts and publishes the consensus forecast.  You’ll have to register (free) at the site to get those numbers.  This site also lists a complete calendar of when earnings are scheduled to be released.

Earnings Impact.  There may be an immediate impact on stock prices when earnings are released. You’ll often hear that a company either “beat” or “missed” the analysts’ earnings forecasts.  So what do earnings mean for stock prices?  It all depends!  Sometimes a company will report earnings that are significantly higher than the previous quarter, and even slightly higher than the consensus forecast.   But instead of soaring, the stock will decline.  That could be because the CEO forecast that <<future>> earnings would likely be lower.  That’s a signal to sell based on future results, instead of buying on the good news about current results.

Earnings reports make headlines and may have a definite short-term impact on stock prices. But, if you’re a long term investor, you’re better off ignoring these fluctuations and focusing on the long term profit picture.  That’s The Savage Truth.

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