Three Things to Look for in an Earnings Report

I enjoy picking stocks and discussing management of portfolios from an amateur's perspective on my blog, Stock Picks Bob's Advice!  One of the key steps in screening for a new stock to include on my blog is an examination of the latest quarterly report.  While there are many pieces of information included in each report, for me at least, there are three things that are helpful in deciding whether an announcement is actually 'good news' or 'bad news'.

First of all, did the revenue and the earnings increase?  I like to see both of these figures showing increases when the announcement is made.  Revenue growth without earnings growth suggests other problems.  Earnings growth without revenue growth indicates a more efficient operation, but cannot continue indefinitely.  When we can read about both earnings and revenue increasing, and hopefully by a significant amount, we may have identified a potential stock market winner.

Some companies have very seasonal financial results.  For these concerns, examination of year-over-year results is useful.  However, if we can identify companies with both year-over-year and consecutive reports of improved results, we may also have identified a company that is producing an impressive financial record.

Second of all, an earnings report taken out of the context of what was expected to happen is of little importance.  In other words, there are analysts who generally work for the larger brokerage firms who specialize in individual companies.  They are given the task of providing estimates for future financial results.  Thus, most major companies will have 'expectations' built into their stock price.  Thus, when a result is announced, it is important to identify what the expectations were to know whether the company exceeded expectations, met expectations, or missed in their report.

Among the news stories, there will generally be one written often by the Associated Press summarizing the financial result and will mention the "analysts polled by Thomson Financial had been expecting......".  In that way we can determine how the company did relative to what was expected.  I always like to 'pick' stocks of companies that are exceeding expectations.

Finally, sometimes within the report the company will mention something about future results.  This is called guidance and hopefully they will be announcing that they are raising guidance.  This is a signal to analysts and investors that whatever calculation they have performed regarding the value of the stock today based on future earnings results should be re-examined.  And increased.  Thus, raising guidance is 'bullish' for a stock price.

In a nutshell, there are three basic things to check for in an earnings report.  Did the company increase their revenue and earnings?  How did they do relative to expectations?  And did they perhaps also take the opportunity to raise guidance?  If we can get all three we have a great earnings report from my perspective.  Less than three does not rule out a 'pick' but when I get all three, I feel like I do when I am standing in front of those one-armed bandits and three cherries line up.

Jackpot!