How to Judge Quarterly Earnings Results From the Biggest Companies

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Following the end of each calendar quarter publicly traded companies announce their financial results, generally in summary form, with the greatest focus on revenue and earnings. It occurs on a specific date during earnings season, and is preceded by earnings estimates coming from equity analysts. The share price typically moves up or down based on the company’s performance as the information impacts trading decisions. Analysts derive earnings per share estimates using forecasting models, management guidance, and fundamental information. These estimates can change in the weeks leading up to the announcement.

The release of the financial results is accompanied by an “earnings call.” The financial results can be released no more than 48 hours prior to the call. On one side of the teleconference are officers of the company, typically the Chief Executive Officer (CEO), Chief Financial Officer (CFO), vice president of operations, and both human resources and legal representatives. On the other side are the analysts who listen to the results and participate in asking questions (Q&A). Not long after the call, the quarterly financial statement detail and footnotes are filed (8-K and Regulation Fair Disclosure) with the Securities and Exchange Commission. Those documents provide far more detail for analysts to corroborate claims made on the calls, and even to detect issues that were never addressed on the call.

The analysts hail from a variety of organizations, from financial entities such as hedge funds and investment firms, to financial media companies and other interested stakeholders who will package the information, comment, and conclude certain takeaways they arrived at. They then publish—for the benefit of shareholders and other investors—to readers who routinely follow these companies and are interested in how the companies are performing.

Factors considered in analyst estimates include financial reports, management guidance, and external economic factors. I have been on these calls—company side only—and listened to the clicking of keys on keyboards as analysts were inputting the reported financial results into their spreadsheets. The spreadsheets are used to calculate financial metrics and ratios that in turn provide “color,” or analysis that goes beyond just the numbers.

The historical quarterly results reveal what happened in terms of performance:

• Did the company fare poorly, or did they deliver solid financial results?
• Did the company meet analysts’ (in the aggregate or on average) expectations?
• Did the company announce new products, markets, or other plans?
• Did the company provide future guidance we consider optimistic?
• Did the company have any financial (unexpected) surprises?
• Did the company fail to adequately address soft, poor, or troubling results of any kind?
• Did the company provide sufficient granularity around product results, or did they aggregate many things to obscure analysis of specific products and markets?

Sometimes management will soft-pedal GAAP (generally accepted accounting principles) and direct our attention to non-GAAP financial calculations that portray a better picture overall. When a company’s earnings call discusses EBITDA (earnings before interest, taxes, depreciation, and amortization), pro-forma (“what if” calculation based upon removing some adverse financial events and results), or “one-time” (arguing that the picture is radically improved if such-and-such unusual event simply had never happened, those are red flags. Oftentimes, companies making losses will point to these other things with the hope that they can “spin” the narrative into something positive, so that their stock price is not adversely affected the next trading day.

Let’s look at a typical earning release, in summary fashion:

Lowe’s announced their first quarter 2024 results on Tuesday.

“We are pleased with our start to spring, driven by strong execution and enhanced customer service,” said Lowe CEO Marvin Ellison. “This quarter we rolled out our new DIY loyalty program nationally, expanded same-day delivery options and took market share in key categories. We continue to gain momentum with our Total Home strategy, reflected in our growth in Pro and online. I would like to thank our frontline associates for their hard work, commitment to customers and disciplined focus on productivity.”

Full Year 2024 Outlook:

• Total sales of $84 to $85 billion
• Comparable sales expected to be down -2 to -3 percent as compared to prior year
• Operating income as a percentage of sales (operating margin) of 12.6 percent to 12.7 percent
• Interest expense of approximately $1.4 billion
• Effective income tax rate of approximately 25 percent
• Diluted earnings per share of approximately $12.00 to $12.30
• Capital expenditures of approximately $2 billion

What is somewhat troubling, however, is that for the past 12 consecutive quarters, 75–80 percent of the S&P 500 managed to exceed expectations, generally by only a small margin, resulting in stocks ticking higher the next day.

Given the difficulty of forecasting financial results 90 days out, the very real possibility of managing revenue and earnings is concerning. With many non-GAAP metrics now tossed around on calls, a lot goes into staging these releases to maximize favorable stock price reactions.

[For more detailed information please see “The Earnings Release Compliance Guide, Public Company Toolkit.”]

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