Understanding Earnings Releases: Analyzing Financial Results and the Role of Analysts
Earnings season is a crucial time for publicly traded companies when they announce their financial performance for the previous quarter. These announcements, which focus primarily on revenue and earnings, have a significant impact on the company’s share price and subsequent trading decisions. However, before the release, equity analysts provide earnings estimates based on forecasting models, management guidance, and fundamental information.
The release of financial results is typically accompanied by an “earnings call,” a teleconference where company officers, including the CEO, CFO, and other key executives, discuss the results and answer questions from analysts. These calls are followed by the filing of detailed financial statements with the Securities and Exchange Commission. These documents provide additional information for analysts to corroborate the claims made during the call and uncover any unaddressed issues.
Analysts come from diverse organizations, including hedge funds, investment firms, and financial media companies. They analyze the information provided in the earnings releases and offer their insights and conclusions to shareholders and investors who closely follow these companies. To go beyond the numbers, analysts utilize spreadsheets to calculate financial metrics and ratios that provide valuable analysis and context.
When examining historical quarterly results, analysts consider various factors. They assess whether the company performed poorly or delivered solid financial results. They also evaluate whether the company met analysts’ expectations, announced new products or plans, provided optimistic future guidance, or had any unexpected financial surprises. Additionally, analysts analyze whether the company adequately addressed any soft or troubling results and whether they provided sufficient granularity around product performance.
One potential concern during earnings calls is when companies focus on non-GAAP financial calculations instead of generally accepted accounting principles (GAAP). These non-GAAP measures, such as EBITDA or pro-forma calculations, can be used to paint a more positive picture or downplay losses. Analysts view these as red flags and remain cautious about their implications.
To illustrate the process, let’s look at Lowe’s first-quarter 2024 earnings release. CEO Marvin Ellison expressed satisfaction with their start to spring, highlighting strong execution and enhanced customer service. The company rolled out a new loyalty program, expanded same-day delivery options, and gained market share in key categories. They also emphasized their Total Home strategy’s success, reflected in growth in their professional and online segments.
However, it is worth noting that for the past 12 consecutive quarters, around 75–80 percent of companies in the S&P 500 have managed to exceed earnings expectations, albeit by a small margin. This pattern often leads to slight stock price increases the following day. The prevalence of non-GAAP metrics during earnings calls raises concerns about how these releases are strategically staged to maximize positive stock price reactions.
In conclusion, earnings releases and analysts’ role in analyzing financial results play a crucial part in understanding a company’s performance and its impact on the stock market. By considering various factors, analysts provide valuable insights beyond the numbers, helping shareholders and investors make informed decisions. However, it is essential to remain cautious of potential manipulation or spin that companies may employ to present a more favorable narrative.
