Here's What We Look for in Earnings Reports

Earnings season is right around the corner, and it can be intimidating to try to get the right information from company earnings reports. But we've got you covered. In this Fool Live video clip, recorded on July 1, Fool.com contributors Brian Withers, Brian Feroldi, and Matt Frankel, CFP, discuss what investors should keep in mind when reading through earnings reports this season. 

Brian Feroldi: I do something similar but my general process for reviewing earnings is like Brian said, I read the press release. I will always try and read the transcript. I like to look at the headline numbers. I like to look at revenue. I like to look at margins. I like to look at profits. Did they acquire anything? Did they buy back stock? Did they make an acquisition? Is there any thesis-changing news? I do constantly compare them to Wall Street's expectations so I can show people how to get those.

Brian Withers: Yeah, I thought you were going to do that. I think that's always a question is that's the headline stuff that comes out, they "beat" on the top and the bottom line, so what does that mean?

Feroldi: If you go to Yahoo! Finance right here on this analysis page, this is McCormick (MKC 1.04%) example. For today, the average estimate is $0.61 in earnings and average estimate is $1.4 billion in revenue. That would be up 7% over the year-ago period. Their earnings are actually estimated to decline $0.12, I'm guessing because of one-timey events. Revenue for next year is only estimated to grow 2%. I'm guessing that's because revenue is getting pulled forward this year due to the pandemic. The tricky thing about Yahoo! is that these numbers change pretty rapidly. Unless you're on there the day of or one day after, these numbers disappear. If you want to see how they do, if you click on the company name and then look through the recent reports, "McCormick Beats Estimate and Raises Guidance." If you click on some of these, they will typically have the history of what happened there for the stock and show analysts estimates, that kind of thing. I always like to look at how the company did versus Wall Street's estimates. Some Fools don't look at them, I do, because I'm a big believer that the best companies not only exceed Wall Street's expectations, but they do so regularly, consistently. That shows me that they know how to manage expectations and they have a culture that beats guidance and then raises it. That's it. That's actually something that is important to me and I look at. Matt, you do anything different?

Matt Frankel: Well, I evaluate banks and real estate stocks. In banks and real estate specifically, it's important to look beyond the headline numbers. Bank earnings and real estate earnings are usually not reflective of how the underlying business is doing. To the extent that it is for growth stocks in the two-year about the cover. Banks, for example, put money in reserves to cover expected losses, which is counted against current earnings. If they decided as a prudent step to their business to put an extra $500 million aside for losses, it can make them miss earnings expectations even though the business did just fine. With banking and real estate, there are a lot of things that really can distort the headline earnings number. It is really important to read, I forget which Brian said it, to read the conference call. But if I say, Brian, I'm correct.

Feroldi: You're right.

Withers: You are absolutely right.

Frankel: Read the conference call. Guidance is usually the thing that moves stocks after earnings. It's worth pointing out. It's not uncommon for a company to beat on both the top and bottom line and for the stock to fall 30%, especially with some of these growth stocks if they disappoint the market with their forward projections because especially with these growth stocks, like the Brians love to talk about, it's all about future expectations. No stock trades at 300 times earnings because of what it did this quarter. The guidance is really important. You want to see the future growth not decelerating. You want to see management's comments on how they're going to keep growth going. For me, management comments are just as important as the numbers themselves. I wonder if you guys agree with that.

Feroldi: That's the story. The numbers are what is happening that's expected to happen. Management's comments are why it's happening.

Frankel: Yeah. A lot of times, you'll see the stock jump when the initial press release hits the market, and then you'll see it move in either direction again during the conference call. You'll especially see this for stocks like Tesla (TSLA -3.40%) where everyone hangs on every word that Elon Musk says. You'll see more of the movement during the conference call than you will during the actual earnings release.