Earnings season is a conflicting time for long-term investors. The idea of quarterly reports just fuels a short-term view of the market. Something long-term investors can get drawn into without discipline and patience. If you know what you’re looking for, the information gained from a quarterly earnings conference call can help you make money.
The error most investors make is getting caught up in just the income and revenue numbers. Sure it drives the stock price, but we want to know why? All the good information, the stuff that matters, is packed inside each conference call and transcript.
Where To Start
The best place to start is the conference call. Every stock has a company behind it. Which should have a website by now. The investors relations section should have a link to the conference call and the transcript.
Be aware most conference calls involve the CEO and/or CFO trying to sell you. They focus on the good news and almost always put a positive spin on the bad. Keep in mind, it’s just a three-month window in the life of your investment too. It’s easy to get caught up in the short-term time frame. So stay focused on your investment time horizon when you go through each earnings report.
The Business Plan
Every company should have a three to five-year business plan. And it should be discussed on every earnings report and conference call. A solid business plan is what will drive long-term growth.
Watch for changes to the plan. Why were the changes made? Was the time-table moved up or back? Is everything still on track for success? All of this will impact income and revenue.
One last thing, if the business doesn’t look at least three years ahead, it should not be a long-term investment.
Guidance numbers are just forecasts for the annual income and revenue for the next few years. Not every company issues guidance. If yours does, it’s something worth tracking.
The guidance numbers basically tells investors if the company is on track to meet its estimates for the year. It should fall in line with any changes to the business plan. At the same time, the CEO should reflect on where the industry and company is headed. This might offer greater insight to the economy as whole.
Major guidance changes from one quarter to the next will have a bigger impact on the stock price then the earnings numbers. And should be watched carefully. If a company does change its guidance, it might be time to reevaluate that stock.
Behind The Numbers
As investors we want to see increasing revenues but we want to know exactly where those revenues come from. Is it market share increase? A new product release? Expansion into new markets? Was inflation a cause? The answers to some or all of these questions will give you a good start to evaluating the company going forward.
Revenues are nice, but profits are needed for long-term investments. If a company is spending more than it’s making, the stock price will eventually fall. Shareholders want to see consistent income growth, know where the income it’s coming from and what the company is doing with those profits.
Is it being used to buy other companies? Issuing a dividend? Increasing a dividend? Announcing a stock buyback? A company sitting on a pile of cash can actually hurt your return. You want to see companies putting that money to work or returning it to shareholders.
A growing company should have growing expenses. You can find healthy spending from newly hired workers, increased R&D or new equipment. And it should be increasing at a similar rate to income and revenues. If expenses are growing faster than that, you want to know why. Was it part of the business plan or did something else influence it?
You can track down the extra costs by digging into the financial statements. Changes in commodity prices are a good place to start.
Commodity prices change on a daily basis. There are ways for a company to hedge these costs over time, but any big price changes will have an impact on the overall cost of business. Which will eventually show up in the earnings reports.
A company that buys commodities, should cover any price changes in the earnings report and how much impact it will have on future income and revenue. Alternatively, the same goes for commodity producers. Which are a great source of information on where prices are heading in the future.
Earnings season is more than just income and revenue numbers. It’s about the information behind those numbers. Which is found when you listen to the conference call and read through the transcripts.
A basic rule of investing is to sell a stock when the reason you bought it no longer applies. Once you have a good picture of the company’s future, then you can decide how the stock fits in your portfolio.