Part of our job as investors is to separate the “noise” of financial media—this year it was the hype about the “Fiscal Cliff” the Government Shutdown, the Twitter IPO etc.— from the fundamentals, that is what the companies are actually doing on the ground. One of the best ways to get a hold of fundamentals is to follow earnings season. We are just finishing up third quarter earnings season, when most corporations report their results from the three months ending September 30th.
What exactly is earnings season? Four times a year publicly traded companies are required to announce their earnings results from the previous quarter. The report that is filed with the SEC is called the 10-Q and contains updated financial statements as well as results broken down usually by business segments and geographical regions. Along with the earnings report the company’s management gives a press conference discussing the results in detail and answering questions from analysts.
On the surface, 10-Qs are usually not exciting reading, they are filled with jargon and lots of charts and financial statements. What can be exciting though is that stock prices often jump or fall based on the report. What sometimes makes earnings season confusing, though, is that market reaction is not so much geared to whether the company did well or did badly but whether they did better or worse than Wall Street analysts were expecting. Management of course always wants to put a positive spin on things so even a bad quarter’s report will be full of positive language about the company’s impressive achievements, downplaying the weak spots.
For example Apple was still firing on all cylinders in 2012 reporting huge growth in revenue and earnings that any company would be thrilled to have. However, growth expectations were so high for the company at that point that the stock fell repeatedly after reporting these strong earnings. Analysts were concerned that the company’s slightly declining profit margin meant that the company’s dominance would not last. At the same time it’s not uncommon that a troubled company will report that they lost money in the quarter, but the stock price will jump because analysts were expecting a larger loss. Also, while the main numbers like revenue and net income usually drive the market’s response, sometimes the market will disregard those things and focus instead on the profit margin, the company’s future outlook or a recent acquisition.
So how is the current earnings season going? It has been an exciting and volatile quarter of earnings. Expectations were low going into the quarter. Zacks Investment Research reported that earnings growth for the quarter lowered to a modest 1.4% from 3.3% in August and nearly 7% at the beginning of the year. Companies were dealing with a lackluster economy, the government shutdown and weakness in emerging markets. But once the reports started rolling out they were a lot better than expected. According to the most recent tally by Zacks Investment Research, with about 90% of the companies in the S&P 500 now having reported, earnings are up 4.6%. 65.5% of companies beat earnings expectations. Total revenues for these companies are up 2.9% and 51.7% are beating revenue expectations.
How did the companies in O’Brien Greene’s portfolios do? It was a surprisingly good quarter of earnings. All but a handful beat earnings estimates. Revenue was another story: only about half of companies we follow beat revenue estimates. We’ve had some great reports this season, though. About two out of three of our companies’ stock prices rose after the report. Some of the highlights were Google (up 12.6%), Boeing (up 5.3%) and Abbott Labs (up 10.3%). Common themes in earnings reports this season were dividend increases and share buybacks as well as new acquisitions and also weakness in the emerging markets. Bottom line: it’s a good earnings season we’re seeing.