GPM Investing Insight: Earnings Season

Earnings season officially kicked-off this week as it does shortly after the end of every quarter. It is a busy time when the vast majority of the nation's public corporations report their quarterly sales and earnings.   

During every earnings season, the GPM research team carefully evaluates results for the 25-30 companies we currently own - each requiring a few hours of time. We read the press releases and supplemental reports, participate in management/analyst conference calls, and reconsider the overall execution and positioning of the various companies. We do the same for another 100+ stocks, including those on our focus list and others to gain valuable insight into specific businesses and corporate America.

As usual, this season opened with reports from a few industrials like Fastenal (FAST) and Delta (DAL), followed by major banks like Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC). For the next three weeks, the pace quickens dramatically, with most of the S&P 500 companies across all sectors reporting. More than a thousand others report along the way.

Quarterly reports are very closely analyzed and can move a company's stock in a major way. For example, a company like Microsoft (MSFT) has many analysts following the company and these analysts try to model what revenue, earnings per share (EPS), and other metrics will be each quarter. For Q1, MSFT will issue a press release after the market closes April 27th, which will contain key highlights and details of results, with an income statement, balance sheet, and other tables included. Analysts closely dissect these numbers to determine trends and update their models. 

Following the press release, Microsoft's management team, including CEO Nadella and CFO Hood, host an hour-long conference call providing more insight into the numbers, as well as answer questions from analysts. Management often sets revenue and earnings guidance for the next quarter and/or the full year on the call. This is very important because investors pay for a stock based on expected future earnings and cash flow. Guidance can have a bigger impact on short-term stock price performance than the initial quarterly results. If guidance is below what analysts are modeling, the stock could go down, while guidance that is in-line with or higher than expectations can drive the stock higher.

According to FactSet, for the first quarter of 2017 (Q1 '17), the S&P 500 is expected to report earnings growth of 8.9%, with a double-digit growth number likely, given that companies report actual earnings above estimates on average. This would be the highest growth rate since Q3 '14, when the rate was +8.1%. 

Clearly, earnings are like a company's report card. We spend a great deal of time every quarter grading the reports for our owned companies and others.  It is one aspect of managing stock portfolios that we enjoy greatly.