THOSE WHO FOLLOW financial news know that mid-to-late July is the middle of earnings season. While I enjoy learning how companies are performing, I also get agitated by the way the media reports earnings information.
Having spent more than 20 years in corporate finance, I know the rigor involved in preparing earnings reports. Company accountants usually take one-to-two weeks to compile financial results, which then are reviewed by external auditors. In addition, investor relations, legal and other internal teams work to ensure earnings reports fairly portray company results. Depending on the size and complexity of a company, this can add up to thousands of working hours before the reports are released.
Instead of taking time to digest management’s messages and business trends, the media rushes out attention-grabbing soundbites. Consider the analyst who was on CNBC when Apple released its earnings this April. Within minutes, he said, “If you looked up ‘blowout earnings’ in the dictionary, it would be Apple’s March quarter.” Apple did have a strong quarter, but there’s no way he could have reviewed more than a few headlines before making this definitive statement.
A better way to learn about a company’s performance is to read the company’s full earnings release yourself. These reports are on a company’s website and include financial statements, as well as key trends for the quarter. Most companies also include business metrics, future guidance and detailed sales information.
As a second step, read the company’s periodic filings with the Securities and Exchange Commission. While quarterly and annual filings with the SEC usually aren’t completed until after the earnings releases, these reports will give you a more comprehensive understanding of company performance as well as its financial condition. I get SEC filings from company websites, but you also can find them on the SEC’s website.
For an even deeper understanding, listen to a company’s earnings call, which can be accessed live via the company’s website or through the site’s archive. The first half usually includes information similar to what’s in the earnings release. In the second half, you can gain valuable knowledge from the question-and-answer session with investment analysts, who usually drill into key trends and issues.
While company management may not answer all questions, hearing what analysts are focused on provides insight into potential opportunities and risks. I also pay attention to management’s tone and approach in answering questions. Are they defensive? Are they smooth? Are they too smooth? Whatever the case, this can offer some understanding of how management runs the business.