Understanding Earnings Season

How to make sense of the quarterly numbers

It’s that time of year again: earnings season. It’s a time when Wall Street analysts find out whether their quarterly earnings projections for the companies they follow have hit the mark. And as you might expect, it can be a period fraught with surprises.

Certainly, if a company has exceeded earnings estimates, a stock can get an immediate bump. Indeed it was a slew of higher-than-expected earnings reports in April–from companies such as Caterpillar, Google, and Honeywell–that helped push the Dow Jones industrial average to new heights.

To find out when a company is releasing its earnings, you can check with its investor relations department. There are also several Websites that can help you find out any company’s earnings release date. Two particularly comprehensive sites are Zacks Investment Research, www.zacks.com, and the Earnings Central page of CNBC’s site, www.cnbc.com.

Beyond the numbers, it’s always helpful to actually hear what management has to say. You should make an effort to listen to, or read a transcript of, the quarterly earnings calls for those stocks you own or are thinking about investing in. Generally, the calls begin with a presentation by management, followed by questions from analysts. Not every call is open to retail investors as it occurs, but many companies have started to Webcast their earnings presentations and even provide the accompanying slides.

What should you listen for? Investors will want to pay attention to remarks about growth rates, product development, retail expansion, and management’s future earnings guidance. Also key is how well revenues keep pace with earnings growth, says Mark Coker, founder of BestCalls (www.best calls.com), an Internet directory of investor conference calls and events. If there were setbacks, does management have a plan to remedy them? Also, notice how the top executives respond to questions. Are they clear and direct or do they fumble over their words?

Pierre Dunagan, president of the Dunagan Group in Chicago, suggests investors explore the reasons a company did or did not show a profit. Don’t focus on just the earnings and income, but on the expenses as well. A company that is devoting significant resources to creating a new product may have relatively weak earnings now, Dunagan says. But if that new product catches on, earnings may begin to soar, he adds.

While you can hear analysts’ comments during conference calls, their written reports are also available through sources such as Standard and Poor’s (www.standardand poors.com) and The Value Line Investment Survey (www.valueline.com). You can find both guides at your local library if you don’t want to pay subscriber fees. Other valuable resources are a company’s public filings with the Securities and Exchange Commission’s EDGAR database, which can be accessed at www.sec.gov/edgar.shtml.

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