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Understanding Companies' Quarterly Reports

Most investors know that the most important dates for any public company’s shareholders are the four times a year when the company reports earnings given the impact these announcements have on the price of its stock. Investors who track these dates also follow closely each company’s earnings 'consensus estimate' as the all-important number to watch for during the report, knowing any given earnings surprise can have a big impact on their portfolio. Yet as elegant as distilling a full quarter or year of a company’s results into a single number may be, the truth is there are many important numbers investors should follow in each earnings report in order to have a good grasp of the company’s financial health and ongoing business conditions and thus the prospects for its stock. Is the company’s growth slowing down or picking up speed? If so, compared to what period? Last quarter? Last year? Three years ago? What do the latest earnings mean to shareholders? Is the stock cheaper or more expensive based on the latest per share figures? How much did the company’s capital structure change? Is it sacrificing long term profitability for the sake of short term growth in order to meet the Street’s numbers?

Investors shouldn’t be expected to understand the full impact of a public company’s reports the way a financial analyst does. Analysts that follow public companies do so for a living and typically follow only a handful of them, whereas investors are regularly scouring the market for opportunities among thousands of stocks and usually have a portfolio with a few dozen companies in them. How then to follow all of these stocks with the rigor of a professional? In order to help investors assess the impact of any public company’s quarterly reports MarketGrader.com has created a unique version of its fundamental analysis report called 'Snapshots.' One of the four fundamental views available on our web site for every company under coverage, this page presents four snapshots of the company’s fundamental analysis following each of the last four earnings announcements. Displayed on the page as four chronologically arranged columns, these snapshots let you see exactly where each announcement had the biggest impact on the company fundamentals without having to spend hours crunching numbers and doing historical comparisons.

Earnings Reports

The analysis is sub-divided into five horizontal sections. The top one provides you with the basic information about each earnings report including the date, the fiscal period covered in the report, the earnings per share estimate and reported value, the impact it had on the price of the stock and the snapshot date. Also, very importantly, it gives you the company’s rating and overall grade following the report.
It is important to understand that our snapshot dates are not the same as the company's earnings report date but instead three business days after the report. This cushion of time ensures that each snapshot reflect not only the effect of the latest company financials on our grades but also the impact the announcement itself had on the stock price and subsequently on our value indicators.

 

Grade Categories

The next four sections show you our four grade categories—Growth, Value, Profitability, Cash Flow—and their underlying indicator grades following each of the last four earnings reports. As you look across the screen you will notice that some of the individual indicator and overall category grades are displayed inside a green or red box. If inside a green box it means the grade improved from the previous quarter following the report. If inside a red box it means the grade fell also from the preceding quarter. If the grade is not displayed inside a box it means it didn’t change from one quarter to the next. After using our snapshots page a few times you’ll realize that a quick scan of the page will let you see whether the company’s fundamentals have been improving or deteriorating from quarter to quarter. You may see, for example, that its Growth indicators may have improved and its Value indicators deteriorated, a sign that the stock may have gained following positive quarterly results, in the process becoming too expensive. Or you may find cases where the opposite may have happened, in which poor earnings reports could have led to a sell off, making the stock appear cheap, at least on the surface. In order to help you understand also how the actual numbers may have changed from quarter to quarter each snapshot also includes a series of charts that show you the change in the company’s capital structure, margins and cost of capital (EVA). Also displayed are the most relevant numbers to our fundamental analysis, which you’ll find relevant to each of the grade categories. And for further research into any particular aspect of a company’s financials you can always go to any of our other three fundamental views.

 

Why Is this Analysis Important?

While plenty of company quarterly reports certainly trigger MarketGrader.com upgrades and downgrades, following a company’s improving or deteriorating fundamentals within a given rating is not only important but may be the key to getting in front of a wave of a potentially big investment or out of the water before the crowd does. Take for example a company with very poor fundamentals that is at the beginning or in the middle of a turnaround. Even if effective, the turnaround is unlikely to dramatically change the company’s fundamentals over night or even from one quarter to the next. To many investors the small improvements the company makes in its operations may be imperceptible. But small changes in profitability such as a gradual expansion of its margins, a gradual repayment of its debt or small monthly and quarterly improvements in sales growth, for example, will start to have an effect on specific MarketGrader.com indicators and by consequence our overall grade. An investor that is able to identify such a trend is likely to get ahead of a bigger wave of buyers and profit from the market’s reaction as the story unfolds. Our Snapshots page was designed precisely with these opportunities in mind. It is meant to help investors identify small changes in a company’s fundamental health from quarter to quarter with a simple and straightforward presentation. In our turnaround example this may refer to a company whose overall grade goes from, say, the low 20’s to the 30’s and then the 40’s before receiving a full upgrade to “hold” or “buy.”

Conversely the same could be said about a company whose fundamental health begins to deteriorate before receiving a full downgrade to “hold” or “sell.” Investors will want to spot early signs of trouble or of a growth company slowing down, for example, thus trimming their holdings or hedging their exposure. An investor aware of such situation may choose to remove from his portfolio a still-highly rated stock that may have earned him money for some time but whose fortunes may have started to fade. MarketGrader.com's Snapshots feature is one more unique perspective our clients have in their research process.

Next: Top Down Analysis