Quarterly Earnings Are Pointless -- Here's Why

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Source: Rain Moth Gallery

Let’s face it -- earnings season is exciting.

After three months of hibernation, the public companies we all love to follow, invest in, and criticize open up their books and reveal their quarterly secrets.

But let’s face another reality: A quarter is just an arbitrary three-month period. Sure, the quarterly changes can seem significant if profits drop 5%, or the market sells off the stock to a tune of 10%, but over the long term, quarterly reports are more distractions than signals of the future.

Real-life example
If someone told you she invested in a bank at the end of 1993 that grew its tangible book value per share by 2% a quarter, you probably wouldn’t think much of it -- would you? That 2% sounds kind of measly.

However, that same person could also tell you she invested in a bank at the end of 1993 that grew its tangible book value per share 484%. And that same person would have also benefited from price-to-tangible book value multiple expansion and gobs of dividends and seen a total return of a staggering 1,190%.

That 2% per quarter book value growth doesn’t seem so shabby now, does it?

This is a real-life example, and the bank was M&T Bank (NYSE: MTB  ) .

As fellow Fool John Maxfield points out, M&T Bank was able to accomplish this outstanding performance by simply writing good loans. A bank that chases growth at the expenses of risk management will undoubtedly feel major pain during times of crises. M&T has felt some pain, but it's always been more of a pinch.

As previously mentioned, since the end of 1993, M&T Bank grew its tangible book value per share at a compounded quarterly month rate of roughly 2%. That doesn’t mean there weren’t tough quarters in the mix. During that time, M&T Bank’s tangible book value per share actually declined an average of once every five quarters.

Think about that. Quarterly tangible book value per share fell almost once every year, and the stock still produced a total return of 1,190%. Still upset about your favorite company’s latest "estimates miss?"

Short-term noise
M&T Bank wasn't the only -- and today, still isn't the only -- company that can get rich slowly. Across the board, as we see droves of companies and banks report earnings, quarterly numbers continue to tell us virtually nothing.

Over at Bank of America, tangible book value per share grew 2% since the end of June, while JPMorgan Chase’s fell by 1%. Does this mean Bank of America is destined to produce M&T-like returns over the next 20 years? No. And it also doesn't mean JPMorgan Chase is a doomed investment.

Slow and steady. Source: William Warby

There are no investment crystal balls that tell us which companies will be the ones to compound value over time via successful capital allocation, growth strategies, and risk management in the future. But we can look to a management team’s track record and comments about risk, how compensation incentives are aligned, and whether or not we are getting a reasonable expected return for the business.

Foolish investors and analysts should spend less time trying to break down the quarterly gyrations in hopes of revealing the optimal buying or selling opportunity and more time reading management’s letter to shareholders, reviewing proxy statements, and asking themselves if the price makes sense.

So next time your favorite company only posts 2% EPS growth, smile, kick back, and remember M&T Bank. 


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2013, at 10:49 AM, Mathman6577 wrote:

    I think I read somewhere that value guru Benjamin Graham looked at average earnings over a 10-year and 3-year period to make his decisions.

  • Report this Comment On October 21, 2013, at 11:48 AM, mikecart1 wrote:

    Article should be "Earnings Are Pointless -- Here's Why" hehe.

  • Report this Comment On October 21, 2013, at 12:55 PM, thebadsteveo wrote:

    The results of a given quarter are a poor indicator of long term value, but the way to have a good long term result is to have a good quarter followed by another, and another, and another for a long time.

  • Report this Comment On October 21, 2013, at 12:59 PM, timc1981 wrote:

    I think this is great advice for long term fundamental investors (ie buy good companies, hold them, and then buy some more). An overwhelming majority of people are not going to beat the S&P by using short-term buy and sell strategies. I get that, and I appreciate the sentiment...it will prevent a lot of people from losing their shirts.

    But, there are a lot of people who do very well holding stocks for a short period, based on technical analysis, fundamentals, and a lot of other insights they might have. For that type of investor, quarterly earnings are very important.

  • Report this Comment On October 21, 2013, at 1:15 PM, BMFPitt wrote:

    Depends on the industry. It would make a big difference for retailers that are heavily dependent on Christmas sales. Banks and stuff like that? Not so much.

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