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Earnings 101: Basics of a Quarterly Report

By Motley Fool Staff – Nov 16, 2016 at 11:49AM

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The investing world floods us with information at three-month intervals, but you don’t have to drown in the numbers.

In this video from Motley Fool Answers, Alison Southwick, Robert Brokamp, and Seth Jayson want to help you decipher the key information in a quarterly earnings report. Follow along as the crew looks over the fictional results from Southkamp Industries.

A full transcript follows the video.

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This podcast was recorded on Oct. 18, 2016.

Alison Southwick: Seth Jayson is a co-advisor on Motley Fool's Hidden Gems. He's a longtime Fool, and he joins us today to help decode the quarterly earnings report. So, I would describe you as someone with a low tolerance for BS. Can I say BS?

Seth Jayson: Yeah, why not?

Southwick: So with earnings season upon us ...

Jayson: Bumpershoots ...

Southwick: ... you are the perfect candidate to help us decipher what companies are really saying or not saying.

Jayson: Mm-hmm ...

Southwick: So, I hope you think that's a compliment that I think you have a low BS meter.

Jayson: Yeah, yeah. You know, in any organization, it leads to some career limiting moves from time to time. But in general, I feel proud of that.

Southwick: So first off, Bro, why is there an earnings season? What's the thing? I know it comes every three months?

Robert Brokamp: Right.

Jayson: After the earnings ripen.

Brokamp: So publicly traded companies have to report their earnings every quarter. Every three months, earnings come out, and then usually, the company issues a report. They might have a conference call or something like that. Most companies, their fiscal year follows the calendar year. Some don't. The federal government doesn't begin its fiscal year until October 1, but most companies do follow the calendar year, which means four times a year, a majority of companies are issuing their earnings, so it's kind of a deluge of information to go through and, in our case, write about and analyze.

Jayson: Yeah.

Southwick: If we're going to decode and decipher an earnings report, we might as well look at one, and so let's take a look at how Southkamp Industries did for the third quarter. Let's cut to Steve Broido with Fool News Network.

Steve Broido: Southkamp Industries missed analyst expectations for third-quarter earnings. Net income fell 5% to $1 million, or $0.50 a share. Analysts expected $1.2 million, or an earnings per share of $0.52. Revenue fell 2% to $5 million. Southkamp Industries also adjusted forward guidance, sending the stock spiraling in after-hours. President and co-founder Robert Brokamp stated on a call with analysts that weather impacted sales this quarter. Brokamp also pointed to one-time charges for a restructuring as it transitions facilities in New Hampshire from loofah production to meet increasing demand for whiskey in the state. Overall, Brokamp was optimistic for growth in the long term -- dynamic scale disruption synergy. These are words. Also the cloud and social media.

Southwick: OK, that is really compelling stuff there, and there's a lot to unpack. So, let's take it from the top and just go sentence by sentence. What is Southkamp Industries saying in this quarter's earnings report?

Broido: Southkamp Industries missed analyst expectations for third-quarter earnings ...

Southwick: What does it actually mean to miss analyst expectations?

Jayson: Well, usually everybody knows what the company's supposed to post in revenue or in earnings and profits. And that's because the bunch of analysts on Wall Street who talk to the company all the time, and look at what the company says when they say, "Hey, we think we'll make between this much and this much, we'll sell between this much and this much." The analysts come up with estimates. There may be five or six. There may be three dozen, and a company like Thomson Reuters or S&P Capital IQ will take all those, put them all together, strain out any differences that are due to one-offs, and then come up with an average. So, that average number is the thing that they will miss or beat.

Southwick: How much stock do you put in that? Oh, no pun intended. Because a stock's price will move.

Jayson: They'll move a lot. I mean, a lot of companies sandbag. Apple sandbagged for probably five years. It was always off by billions of dollars.

Southwick: And sandbagged by meaning they come in big, saying they're going to do poorly but then they ...

Jayson: Oh, we think we're going to do this much, knowing they would do much better. The analysts would say, "All right, we think they'll do this much better." Then the number would be even better, yet, and everyone would go, "Hooray!"

Southwick: Crushed it!

Jayson: So, yeah. It depends to a large degree on how much hand-holding the company is doing to get that number where they want it to be for maximum BS-ness.

Southwick: Great. Let's move on in the article.

Broido: Net income fell 5% to $1 million, or $0.50 a share. Analysts expected $1.2 million, or an earnings per share of $0.52. Revenue fell 2% to $5 million.

Southwick: Earnings per share. Revenue per share. Sales per share. What's all this stuff?

Jayson: So revenue -- most companies don't report revenue per share, obviously. But earnings per share is what we get out of the stock at the bottom line, so that's the net profit divided by the number of fully diluted shares, usually. So, the revenues and the earnings are usually compared to the prior-year's quarter, because that's where it's more comparable.

Companies are seasonal, and a lot of companies are going to do a ton of business around the holiday season, and those would be retailers and companies like that. The companies that are producing the stuff that gets sold into the holiday season -- their bigger quarters are going to be maybe the quarter before the holiday season, when they're selling the stuff that's going to go into the stores. So, in order to get the best comparison, you're usually looking at the prior-year quarter.

So, that's the standard. You know, I had a robot -- I call it a robot. It was an automated spreadsheet that I created at one time that actually used to write the whole article.

I mean, it would grab all the data, and it would come up with these sentences, and do all the comparisons like that. The reason I did that was the robot wouldn't screw up the math, ever, like I might if I were doing it.

And those numbers you were also comparing to the estimates. So, the analysts will have estimates on revenue, and they'll have estimates on earnings per share. So these are the numbers we're comparing.

Seth Jayson has no position in any stocks mentioned. Alison Southwick has no position in any stocks mentioned. Robert Brokamp, CFP has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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