Analyst Insight: Your Earnings Season Cheat Sheet

Analyst Insight: Your Earnings Season Cheat Sheet

We're into the thick of it with earnings season, following Netflix's (NFLX) major subscriber miss last week, which saw total users fall by 200,000. Next up this week are the biggest names in the business, including Apple (AAPL), Microsoft (MSFT), and much more.

You can see a complete list of all the MyWallSt stocks reporting this week here.

However, here at MyWallSt, we have a mixed view of the quarterly earnings cycle. On one hand, it’s extremely useful for us as analysts to get this level of insight into these companies every twelve weeks. Publishing their books like this means that they can hide very little from the investors that buy their shares, which can only be considered a good thing really.

However, as we have noted before, the requirement for companies to go through the reporting ringer four times per fiscal year is also a negative as it encourages leadership teams to focus on short-term wins rather than long-term success.

Nonetheless, as long-term investors, we should take this opportunity to look at the books of the companies we own (or maybe ones we’re planning to buy) to see how they are executing on their plans. 

Given the current fears around COVID-19 resurgence in China, inflation, the threat of recession, and more, it will also be important to see how businesses are balancing their book in the midst of so much uncertainty. Forward-looking guidance may be a bit clearer than this time last year, but could still be unpredictable, and as noted in a previous Daily Insight:

“Cash on hand and access to credit will be very important for companies over the next 12 months as we navigate this new unknown. Most of the time we like to invest in companies that aren’t burdened with debt, but in times like this, we want to see plenty of cash in the bank to ensure they will be able to survive this slowdown, particularly with interest rates so low. Competent managers will have ensured that’s the case.”

As always, we provide MyWallSt members with brief overviews of the main earnings news every morning in our Market Headlines, as well as more in-depth insights in Daily Insights like this and the ‘Our Opinion’ section on every stock page. 

However, if you want to do some digging into a company yourself, here are some of the main things to look out for:

Revenue

Revenue — also known as the ‘gross income’ or ‘top line’ of a company’s earnings — is the total amount of money earned by a company in the last quarter. Revenue gives the broadest sense of how a company has performed over the past three months and gives the investor a good benchmark of the inward flow of cash.

There are a few key things to recognize beneath the broad stroke of the revenue brush, however, such as the difference between ‘operating revenue’ and ‘non-operating revenue’.

Operating revenue is a valuable metric as it shows the consistent flow of money into the company from a conventional business activity like product sales. Analysts can use the operating revenue figure to sketch out an accurate model of the regular capital that the company can expect to earn.

However, non-operating revenue is much more inconsistent. Non-operating revenue (sometimes called ‘one-time items’) refers to money made from unconventional business activities like the sale of a warehouse, lawsuit settlements, or any interest they might have on cash in the bank. Non-operating revenues like this are irregular sources of capital and can end up distorting the overall revenue figure.

Earnings

Earnings, profit, net Income, the Bottom Line. Whatever name you give it, the earnings figure is the most important metric released in a quarterly report as they have the most direct impact on the share price of a company.

A company’s earnings figure is the overall amount of money a business has made in the last quarter, including expenses and tax. This means it gives a more detailed reflection of the company than revenue because it incorporates all the money that has come both in and out.

Earnings Per Share

Companies also include earnings per share (EPS) with their earnings report. As the name suggests, the EPS is just another way to consider a company’s earnings figure.

Instead of using a large overall number, the EPS shows exactly how much profit the company earned on every single share they offer. This makes it a useful metric for investors as it shows them the specific impact of a company’s profit in terms of each share you own.

The EPS is calculated by dividing the overall earnings figure by the number of shares outstanding.

Analyst Estimates

So now we know what it means when a company reports revenue, earnings, and EPS. But what do we measure these against?

One of the most common benchmarks used to assess a company’s quarterly report is analyst estimates (often called ‘Wall Street estimates’ either). As you see quarterly reports emerging, you’ll often hear pundits say that a company has either ‘missed’ or ‘beat’ on earnings or revenue. What this means is that the report has either fallen short (missed) or exceeded (beat) the general expectations of the investing community.

These expectations are formulated by analysts who closely monitor the industry or market. Prior to the release of earnings reports, these analysts will pour over cash flows, forecasts, management guidance reports – even general market sentiment — and try to accurately predict a fair target for the company to hit in their report.

These estimates are then collated into a consensus estimate by institutions like Thomson Reuters. This gives a benchmark average that a company is expected to achieve with its earnings report.

These analyst estimates are extremely influential, as a miss or gain on these will usually result in a significant shift in the share price either up or down.

Other Benchmarks

Analyst estimates are the most commonly used benchmarks for revenue and earnings figures, but there are other comparisons used to understand how well a company has performed.

Companies will usually issue their own guidance on what they expect to achieve for the next quarter with each report. This can be used to see if what they achieve every three months is in line with what they expected to achieve. However, there can be a habit of under-promising and over-delivering with some companies here, so these guidelines shouldn’t be taken as gospel. Also, with the current uncertainty over stores reopening and the economy getting back to normal, a lot of companies might decline to provide guidance.

Year-over-year comparisons are also used to show how much a company has grown (or declined) over a 12-month period. This simply involves comparing the results of this quarter with the same quarter a year ago. This is often used in analyzing the holiday quarter (October to December), as the increased sales usually seen at this time can only be fairly analyzed relative to the same period the year before.

One other benchmark that’s often used in the restaurant and retail industries is comparable same-store sales. This refers to the difference in revenue generated by a company’s existing outlets over the quarter compared to a previous quarter. It omits sales from new stores in order to gauge the traffic at established stores or outlets.

JamesJames

Sign up for free to continue reading.