How To Be Prepared For Earnings Season
What to look for in earnings reports, and stocks I'll be following this reporting cycle.
This article is not financial advice and is meant for informational purposes only. At the time of writing this, I own shares in PG.
Earnings Growth Drives The S&P 500
The price action in a market index like the S&P 500 often leads stock earnings. If earnings are expected to be up 15% in the next year, stocks will often run up higher in anticipation of these higher earnings. The same can be said on the downside. In 2022, for example, stocks fell in anticipation of lower earnings in 2023, and in 2023 stocks gained on anticipation of better earnings in 2024.
If you’re a long term investor, why would you care about quarter-to-quarter earnings reports? Well, if you buy a broad market index like the S&P 500, you probably don’t and shouldn’t care. The trend has typically been higher throughout history, and is expected to continue this way.
If you own individual stocks, however, quarterly earnings reports are critical to understanding the future of the business you own. Buying “the best companies” works until it doesn’t, and you need to know if one of your “great companies” is becoming a not so great company. An example of this that I have used in the past is 3M. Once a staple of a blue-chip portfolio, now this stock seems to only lose value. Today I want to discuss what you need to look for when reading company earnings reports so that you can be prepared for earnings season.
Remember, Analysts are Bad at Their Jobs
For years now on Twitter (sorry, X) and here on Substack I have railed on analysts who constantly get it wrong. Obviously there are some good analysts, but those are few and far between. The reality (and problem) is stocks react not to the reported numbers compared to previous quarters, but how those numbers compare to analyst expectations. If a company grows earnings at 12% but 13% was expected, look out below. This has always beyond frustrated me, but it’s something that we have to live with, and sometimes take advantage of.
My piece of advice is to ignore what a stock’s price does after reporting earnings. It tells us nothing about the earnings report. Sometimes a move higher or lower is justified, others it is not.
What I Look For in an Earnings Report
In reality, I read every single word of an earnings report. I don’t like to miss a single detail, especially if it is a company I write about here on The Simple Stock Report.
That being said, for the average person, I recommend reading two portions of the earnings release: The general commentary given by management, and guidance.
The below screenshot is from Procter & Gamble’s last earnings report. At the top you see the headline sales growth, EPS, and a few other metrics scattered throughout the first two paragraphs. It might be a good idea to keep a running tally of these quarter-by-quarter for reference purposes, but this is the basic information you can find anywhere.
On the bottom half of this screenshot is a paragraph of comments from P&G’s CEO Jon Moeller. Here, you get an idea of how he feels his firm performed in the quarter, and often you can sense the tone. While most of the time this will be an upbeat quote, any negative comments should send off the alarm sirens immediately. Don’t brush off these comments, as they will often set the tone for the conference call.
The second portion of the earnings report is often the one that moves the share price. Company guidance is much more important than the numbers reported for the most recent quarter because the stocks usually trade on tomorrow’s expectations. As you can see below, P&G offers guidance for many different metrics, and details the headwinds and tailwinds they see for each guided metric. While not every company is as detailed, guidance will often tell the stock price story for a given quarter.
Of course if you want to get more detailed, reading over the financial statements to see what changed, what got worse, what got better, and everything in between can tell you a lot. Statement of Cash Flows could tell you the company is taking out more debt, or spending more on capital expenditures. The Income Statement could show margins improving, and so on.
And of course the earnings call is full of great information and (sometimes) great questions from analysts, but unless you are seriously committed like me, it might be more useful to use to fall asleep at night.
As We Head to Earnings Season
Looking at management commentary and forward guidance is almost the bear minimum when reading earnings reports, but will still put you ahead of many investors. Understanding how the businesses of the stocks you own are doing is critical to being a good investors, and might be a key to tell you when to buy or sell. Don’t be convinced you own a great company and don’t have to worry about slowing or worse earnings, because eventually you might end up like a 3M or Walgreens Boots Alliance shareholder, hoping to just breakeven one day.
We get four earnings seasons per year and I love every one of them. For a 2-3 week stretch of time every day is absolute chaos in the stock market, with stocks flying everywhere. As we head into the thick of it, I’ll be continuing my coverage of the following stocks:
Procter & Gamble PG 0.00%↑
Kimberly-Clark KMB 0.00%↑
Kenvue KVUE 0.00%↑
3M MMM 0.00%↑
I have covered each of these stocks for some time now on The Simple Stock Report, and I don’t plan on stopping. All of my past reports on these companies are available on my Substack. In my opinion, my Procter & Gamble reports are some of my best writing, and my 3M reports show that I won’t hold back on calling a bad company bad.
Here’s to a great earnings season, full of making money!
Nice post Michael, also agree that guidance and checking that management is meeting that guidance is key when checking earnings.
Don't follow any of the companies you mentioned personally but will be looking forward to the tech company earnings over the next few weeks!