Earnings season is always a great time of year to get up to speed on what corporations are saying about business conditions. The numbers are also useful in the sense that you can garner a lot of market intelligence regarding specific industries. And even if you aren’t interested in a specific company, brand-name earnings (or at least a summary of the numbers) can help hone your market view.
But it’s not just about how capital markets interpret corporate results. While earnings are managed, investors need to know if there is genuine sales growth taking place and in which market.
One trend that’s been evident for a number of quarters now is that many companies have been able to modestly increase their prices without materially affecting demand.
During the first-quarter earnings season, many corporations said that their operations in Europe were experiencing renewed vigor. It will be interesting to see if this trend continues this earnings season. Many times, quarterly results reflect one-time events or short spurts in either industrial or consumer demand that aren’t indicative of a new trend you can bet on.
Earnings reports are simply press releases in which companies put their best spin on what’s transpired during the quarter. The real news is the numbers themselves, and a company’s income statement and balance sheets are where I begin to look.
Also invaluable are U.S. Securities and Exchange Commission (SEC) filings, especially the Form 10-Q, which is a much more informative document. The numbers can still be unaudited in the quarterly filings, but not the Form 10-Q, which is a detailed annual report that requires fully audited numbers.
I’m still of the view that second-quarter earnings results will surprise to the upside, especially among blue chips, which can translate any sales growth (globally) right to the bottom line.
Currency translation is always an issue, but the marketplace knows this and investors seemingly attribute less weight to currency effects because it’s a known uncertainty.
If you are an aggressive equity investor, I do believe it’s a worthwhile endeavor perusing the earnings reports of brand-name companies. It’s a great way to get news from the horse’s mouth, so to speak, instead of getting the spin from the media or otherwise.
Most blue chips are quite good at breaking down their financials by geographic region and by operating divisions. And the big companies are typically good with their year-end outlooks, which is what institutional investors will bet on.
If a 3M Company (MMM) or PepsiCo, Inc. (PEP), for example, says that sales growth will be between eight percent and 10% higher in calendar year 2014, it’s a believable financial expectation.
Looking back on the stock market’s performance during the second quarter, there were very good performances among large-cap technology companies, especially old school tech names, like Microsoft Corporation (MSFT), Intel Corporation (INTC), and even Cisco Systems, Inc. (CSCO). (See “What Investors Need to Know About the Current Market Cycle.”)
The earnings reports from these companies are valuable information and offer great intelligence on both the economy and the stock market.
I think they will do well, starting with Microsoft’s earnings report next Tuesday.