Five Simple Steps to Make Sense of Earnings Reports

We remain in the midst of fourth-quarter 2024 earnings season. LSEG Data & Analytics says that S&P 500 index companies, in aggregate, are beating analysts’ earnings expectations by 6.3%. This is close to being in line with the average earnings beat over the past four quarters—good, but not remarkable.

Those of you who own individual stocks have already been inundated with earnings reports. It can be a lot to go through. I follow a routine process for analyzing earnings news that I’ve found helpful. It identifies key information from earnings releases and other sources without requiring a significant amount of time.

Here is what I look at:

1. Earnings Release: This is the bread and butter of corporate earnings announcements. The changes in revenues, net income and earnings per share that the company reports are the obvious key numbers to look at. I also scan through the company financial statements to compare how the various line items have changed on a year-over-year basis. I do this to identify any significant year-over-year changes in gross profit, debt, inventory, etc., that are worth investigating.
   
   Dividend increases are also important for dividend-paying companies. For the stocks held in the AAII Dividend Investing (DI) model portfolio, I compare the latest dividend increase to past dividend increases. I want to know if the new increase is within the range of past increases, below it or above it.
    
2. Consensus Earnings Estimate: Ideally, reported earnings per share are above the average forecast by analysts at the time of the announcement. We define a positive or negative earnings surprise as reported earnings that are at least 2% above or below the consensus estimate.
   
   If guidance about future earnings is provided, I compare that to analysts’ expectations as well. Ideally, the midpoint of guidance should be above expectations.
    
3. Earnings Presentation Slides: These are usually available in the investor relations section of a company’s website. Look for Events and Presentations or a similar heading. There is often additional information in these slides about the performance of each business segment, industry trends and management’s observations.
    
4. Conference Call Transcripts: I access these on SeekingAlpha.com. While investors can listen live or access a recorded version of the conference call on the company’s investor relations website, I prefer scanning through the transcript. I seek out color on the business trends, expectations for upcoming quarters and explanations of any notable year-over-year changes on the balance sheet. I scan both the executives’ prepared remarks and the Q&A session with analysts instead of reading the transcript word for word.
    
5. Form 10-K: This is an annual filing required by the U.S. Securities and Exchange Commission (SEC). It is available in the SEC’s EDGAR online database. It provides more detail than the earnings release. The notes on the financial statements, for instance, will provide insights on why, say, inventory rose. The Form 10-K may also provide updated numbers on the percentage of revenues key customers accounted for. Large companies have 60 days after the end of their fiscal year to file their Form 10-K, while smaller companies have up to 75 days.

This type of analysis often takes less time than you might think. I can do all this in about 15 minutes if I’m not taking notes or looking more closely for explanations of changes I identified.