As investors grow more familiar with the companies in their portfolios, there's a few times a year that build near Christmas-like anticipation: earnings season.
Companies typically report their earnings quarterly. Since they have to get their financial statements audited, checked, and re-checked, there's a slight lag between the end of the quarter (generally the last day of the months of March, June, September, and December) and when earnings are actually reported, so they typically are announced in April, July, October, and January. This is not to say that all companies report during these periods; companies can make up their own fiscal quarters and years if they wish.
Public company earnings are reported, well, publicly. The company CEO or other top management will hold a conference call with investment bankers and institutional investors, and tell them everything the company sold and earned during the quarter. Bankers and investors can ask questions on the call, which can get intense if the company delivers bad news. Retail investors like yourselves can listen to these calls as well, as they might linked to the company's stock listing on Google Finance.
Traditionally, Alcoa, the aluminum producer, is the first company to report, kicking off earnings season for public companies. Investment analysts cling to the company's every word, as they believe that a pattern in Alcoa's reporting may be repeated by other companies, even if they're in a different industry. For example, if Alcoa's earnings go down, and the decline is related to a slowing in construction of homes, analysts can extrapolate that other parts of the economy might slow down, too, from related industries like home improvement retailers (such as Home Depot) or seemingly unrelated ones like PepsiCo (can't forget what sodas come in!).
To that end, earnings season also gives investors an idea of the condition of the overall economy. If companies' earnings are falling across the board, it is likely a sign that consumers are not spending, probably because they can't afford to. If earnings are growing, then the economy is likely on a good curve, going up.
Investors also use a company's earnings announcements to try to predict what's to come in the company's future. For example, Apple's third quarter earnings were announced last week, on July 23. (Click here if you don't have Wall Street Journal access.) The company announced that sales of the iPhone had grown 20% over the past year, but iPad sales dropped 14%. Revenue was basically flat and profits declined 22%. From this information, investors might gather that Apple -- historically an extremely innovative company -- may be losing its edge, especially to competitors like Samsung. Investors show displeasure with earnings results by selling the company's stock, but they didn't sell off Apple very much, showing that they still believe the company can recover.
One thing to note during earnings reports is source, and quality, of earnings. The best reports come from increases in revenues, which lead to increases in net income (profit, or earnings). What we're seeing now overall is companies whose revenues are staying the same, but profits are increasing. This is still good, but could be better. The increase in profits here is coming from decreases in expenses; companies may be cutting back on spending on supplies or even salaries (layoffs!) to save money. This will result in an increase in earnings, but investors want to see growth, not just cost cutting.
While it's not good to obsess or make snap judgments based on one earning's report, I believe that retail investors should pay attention to these announcements and listen to the calls, if possible. If anything, they're a great way to learn more about the company, the closest to an insider's view many of us will ever get. But remember to keep the big picture in the mind: what's going on with the company's competitors? What's going on with the overall economy? In times like these, those questions -- especially the latter -- matter more than anything.
No comments:
Post a Comment