Money Talks with Jonathan Perrin: Episode 1
Welcome to our newest segment, Money Talks with Jonathan Perrin. Follow along and hear the latest on all things current in the financial sector with Jonathan Perrin, a current professional baseball player and also certified financial advisor. Here we hear from an expert on both sides of the field and give you insights to latest trends in the market from a professional athlete. Think A Frugal Athlete's version of Mad Money with Jim Kramer.
Quarterly earning reports are an important part of any person’s investment research. Once per quarter (4 times per year) companies give investors a snapshot of how their business has performed over the last 2-1/2 months. Your typical quarterly report consists of three parts: a slideshow, a conference call, and a form 10-Q filing with the Securities Exchange Commission (SEC). The slideshow provides the financial metrics and breakdown of the business during the quarter that is being reported, as well as guidance going forward. Then after the slides are presented the company brass takes a conference call to discuss the results of the quarter, and then fields questions from a group of analysts. The form 10-Q is filed with the SEC and contains any and all relevant financial information as well as any other information that is provided by the company. After the company presents its quarterly results analysts covering the company then update their recommendations for the stock based on the updated information.
The financial statements of each earnings report provide a look at the three main components of business: sales, expenses, and net income. When reading about an earnings report or watching financial television you will often hear this referred to as the top and bottom lines. The top line is the company’s revenue (sales), and the bottom line is the company’s earnings (sales minus expenses). These numbers are typically shown for the most recent quarter, the previous quarter, and the same quarter from the previous year for the purposes of comparison. Revenue and Earnings growth are two of the most important metrics in finance, and the single most important number in finance is the earnings-per-share (EPS) number. EPS is the earnings number divided by the total number of shares outstanding. The reported earnings per share number is what determines a companies Price-to-earnings multiple (Stock Price/EPS of the last 4 quarters combined) which determines how expensive a stock is relative to its peers. Typically, investors will pay a higher multiple for more growth, and a lower multiple for companies that are not growing as quickly. A company can also report a loss for the quarter, which would mean that their EPS number is negative, and therefore their P/E multiple would also be negative.
This snapshot into the company’s performance is important for multiple reasons, first off you are given a chance to look at the companies financial performance and see how much money the company has made (or lost) in its most recent quarter, which gives you that all important EPS number, the earnings report also allows you to see the financial predictions that a company is making for itself going forward into the future, revising their guidance up or down can have as much if not more impact than the EPS number on the stock price after the report comes out. Second, the conference call is also a great way to take a deeper dive into the performance of a company. By listening to what the company’s executives have to say about their performance, and their answers to questions from analysts you can begin to get an even clearer picture of the company than if you were to just look at the financial release. You can either locate the connection for the conference call on the company’s investor relations page online, or you can find a copy of the transcript. My personal favorite site to read transcripts is on seekingalpha.com. Third, this update provided by the company allows the analysts following the stock to update their projections for the company as well. Typically, after the earnings report analysts go back and do the math based on the new financial data available and come up with updated buy/sell ratings and price targets for the stock. `
So now that you know what is going on during an earnings report, lets talk about what happens from a stock perspective around an earnings report. Going into an earnings report there are projections on both the companies top and bottom line created by the analysts covering the stock. This is typically referred to as the “Street expectations” for the upcoming earnings report. The numbers from the company’s quarterly report are then compared to analyst’s expectations. If the numbers that the company reports come in higher than the analyst’s projections this is what is called a “beat” if the numbers come in under the expectations it is called a “miss.” A company can beat the top line and miss on the bottom line or vice versa. Typically, but certainly not always if a company beats on both the top and bottom line the stock price rises as investors react to the better than expected results. Similarly, if a company falls short of expectations, the stock price typically will react negatively. The wider the gap between the expectations versus the actual number in either direction typically results in a more extreme move. Research has shown that companies that consistently beat earnings estimates outperform the market.
Volatility - The days leading up to, and the days after a company reports earnings are typically the most volatile days of the year for their stock. With all these updated financial statements it gives investors and traders a chance to update their outlook and buy/sell the stock based on the company’s performance. Stocks can have violent swings both up and down based on earnings news, and they do not always move in sync with whether or not the company beats or misses expectations.
Earnings reports are a valuable tool. Four times a year investors are given a glimpse into the financial performance of each company. This is one of the basic parts of fundamental analysis. Understanding the mechanics of an earnings report is an important tool in any investors research. Being able to navigate earnings reports and the price swings that come with them require you as an investor to understand your investing plan and know your risk tolerance. For most investors with a long-term investment horizon the shocks that come from these quarterly reports are updates on the company and should be used as a research tool to stay up to date with the status of the company that you own, and if after doing your homework on the company your outlook does not change; then the volatility that comes with these reports is not something that will affect your investment thesis. Only when fundamental problems within the company are exposed within this snapshot will your long-term view on the stock change. Now if you are willing to take on more risk and are on a short-term investment horizon in which you are looking to trade around an earnings announcement. Then earnings reports present an opportunity for higher levels of volatility in order to make a short-term trade. These short terms trades however present a much higher risk level, and while there is opportunity for short term profits, if a stock misses its estimates losses have to the potential to be quick and steep. Doing your research before investing is always crucial and understanding how to navigate these quarterly reports is a valuable tool in your investing toolbox.