Earnings 101: Sorting Out the Meaningful From the Meaningless

By Markets Fool.com

In this video fromMotley Fool Answers, Alison Southwick, Robert Brokamp, and Seth Jayson want to help you decipher the key information in a quarterly earnings report. This time, they turn their attention to guidance, one-time charges, the weather, and more.

Continue Reading Below

A full transcript follows the video.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

This podcast was recorded on Oct. 18, 2016.

Alison Southwick:Southkamp Industries also adjusted forward guidance ...What does this mean?

Continue Reading Below

Seth Jayson:The forward guidance is that thing. We talked about Apple sandbagging this thing.Oh, we think next quarter we'll sell all this much stuff.Not all companies do this. Companies in duress had to stop doing this because they don't want to disappoint anyone anymore, and they just don't know enough to do it.

Most companies will give some idea what they think they're going to be selling over the next quarter, and then maybe for the next year. That may be aspirational. In a lot of cases, they'll know much more because they maybe will have an order backlog that technically is not revenue. It's not deferred revenue, yet, but it's firm, or fairly firm commitments to buy stuff in the future, so it depends on the company. And they have an idea what their costs are going to be going forward, so they can predict earnings as well as sales.

Steve Broido:Southkamp Industries also adjusted forward guidance, sending this stock spiraling in after hours.

Jayson:That's the thing that usually does it. Usually screwing up on what you earn isn't such a big deal. Most people probably will have figured it out by the time the earnings release comes out. Not that there aren't surprises, but loose lips sink these ships usually before their earnings report.

But usually in nervous times, [what] makes the company's stock sink is when they say, "Well, we're not so sure we're going to do well next quarter." Then everyone goes, "Ahhh!" because what happens on Wall Street is when you draw a graph predicting what the next year's performance is, it's always the last two points on the graph, and that's your trend line. So if something goes down, it's "Oh, my God. They're going to go down forever."

Southwick:They're going to go down forever!

Jayson:Yeah. And if it goes up by a big one, "Yeah! We're all going to be rich!"

Robert Brokamp:Tell us a little bit about after-hours.

Jayson:Oh, the after-hours part. You don't have to pay attention to that. There's a very bad term that I won't repeat here that people use for that, but it's basically, after-hours trading is thin. There's not a lot of volume, and so the prices can gyrate wildly after-hours compared to what they would do during a normal time period, when there's more volume.

Broido:President and co-founder Robert Brokamp stated on a call with analysts that weather impacted sales this quarter.

Jayson:Excellent. We hear that. And this is one thing. We're going to have a drone program for investor relations departments that continue to use "impact" in that way. Had an impact. That's OK. Impacted? No. Just stop it. They mean affected, and they usually mean affected to the down side. Although they'll also say "positively impacted", and you're going, "What is wrong with you people? You need new jobs." So side rant.

Southwick:We should say that Jayson is very big on grammar.

Jayson:Uh, yeah. Anybody who reads anything understands that people who are decent at writing don't write things this way, and I don't understand why investor relations departments do. But they use a lot of excuses ...

Southwick:Are we going to blame millennials again? We can ...

Jayson:No, no, it's not. They've been doing this for the past 10 years. It's people my age who think they know more than they do. Imagine that! So, excuses. You'll see weather as an excuse. Sometimes it's bogus. Sometimes it's completely reasonable if there's a snowstorm that shuts down the East Coast, and you are following a company.

Like one of the companies I follow that I own is Five Below. A lot of the stores on the East Coast. Well, that's probably going to take sales down. Now, to its credit, I think Five Below usually says something along the lines of, "We try to not whine about the weather." BREXIT -- some of that stuff will matter. Currency fluctuations will matter a lot to some companies depending on where they source their stuff, where they sell it. So, you want to look at some of these excuses. Some of them are perfectly valid some of the time, and sometimes it's complete BS.

Southwick:How often do you think a CEO is like, "Man, we had a brutal quarter," and then they're like, "Oh! Hurricane Matthew! Yes! We can blame that!"

Brokamp:Thank goodness there was a hurricane.

Jayson:Yeah, probably more often that we would like, and it depends on the companies. A lot of the companies I follow, you won't see that kind of nonsense, or if they mention it, they'll say, "But we realize we need to do well in any climate." Climate, yes!

Brokamp:There you go.

Broido:Brokamp also pointing to one-time charges for a restructuring as it transitions facilities in New Hampshire from loofah production to meet increasing demand for whiskey in the state.

Southwick:Inside joke.

Jayson:I think whiskey and loofah go well together.

Southwick:You have no idea.

Jayson:Do all the viewers know that the loofah is a vegetable and not a sea sponge?

Brokamp:I didn't even know that.

Southwick:Oh!

Jayson:It's like a skeleton of a gourd. I learned that when I worked at Crabtree & Evelyn in the mall. Times were tough back in the day.

Brokamp:This is last year.

Jayson:Yeah. So one-time charges. These are interesting, because sometimes they are one-time. So, if a company is transitioning a major product line, and they don't tend to do that very often, you're going to get varying costs. Maybe from severance to get rid of some of the people there, if they can't use them anymore. Costs to shut down a plant, or a cost to move things. Those are valid one-time charges.

Analysts will usually already have an idea what those are going to be and have kind of netted them out of the estimates, and there will usually be sort of a pro forma earnings number that nets that out, and you want to see if those two comparable numbers match. But there are other companies --Terexbeing one that makes cranes, and tractors, and things like that -- that are in a constant state of reinvention, and they have a lot of restructuring one-time charges all the time. Well, a company like that, you want to look at these, really, as continuous charges, and just put them in as a cost normally.

Brokamp:Basically they're saying, "Yeah, we had these costs, but that's never going to happen again."

Jayson:They're not going to happen again.

Brokamp:But for some of these companies, they just keep happening.

Jayson:They do keep happening at some, yeah.

Southwick:Can you think of any big offenders of this?

Jayson:Well, this isn't even an offender. I would say reading calls from somebody like Terex or another large industrial that is constantly having to reinvent itself -- I don't know if they even call them one-time charges. They'll call them restructuring charges and things. I don't think anyone tries to game that too often, anymore. It's kind of unfortunate for somebody like me, who's a fan of sniffing out scumbags.

Brokamp:Unfortunately, the world's becoming a better place.

Jayson:Yeah, the chicanery seems to be ebbing these days, at least in the larger publicly traded companies. I just don't see as much of it anymore.

Southwick:That's nice. That's good to hear.

Jayson:Yeah.

Southwick:Let's move on in the article. We're almost done.

Broido:Overall, Brokamp was optimistic for growth in the long term. Dynamic scale disruption synergy. These are words. Also the cloud and social media.

Southwick:So, yeah.

Jayson:Yeah, and then there's all that stuff. You'll get more of that if you go to the conference call transcripts. A lot of the financial news sites will just have them in the news feed these days. And again, some of that stuff will happen. Sometimes you do get synergy if you tack one company onto another one; you won't need both sales teams, or you'll be able to transfer the process from one to the other, and they'll get more efficient. But other times, that's just BS, and all you've done is staple two companies together with the same cost structure, and they could just as well have been separate. You're not going to save any money that way.

Scale -- it's similar. As companies grow they tend, hopefully, to need less cost per item of stuff that they sell, but that again, doesn't always happen. It depends on what they're selling. And yeah, the social media. I don't think anybody makes that work to a large degree.

Some of them do, though. Some companies do a better job with e-commerce and social media and have made better transfers than others. Somebody like Under Armour has got a pretty good e-commerce platform. Probably Lululemon. These are allHidden Gemscompanies I own. That's why I'm familiar with them. Kind of blended bricks and mortar with online sales and social media fairly well.

Or in Under Armour's case, even cloud by buying up a bunch of fitness cloud-run and sports-tracking services, which I was very skeptical of at first, because it cost them a lot of money. Still not sure if it's worth it in the long run, but it's a decent opportunity for them to be much more informed about their core customer and be able to reach out to them

Seth Jaysonhas no position in any stocks mentioned. Alison Southwick owns shares of Lululemon Athletica. Robert Brokamp, CFP has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Lululemon Athletica, and Under Armour (A Shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Five Below and Terex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.