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Profits 101: Basics of a Quarterly Report

In this video from Motley Fool Answers, Alison Southwick, Robert Brokamp, ​​and Seth Jayson want to help you decipher the key insights from a quarterly earnings report. Follow him as the crew examines the fictional results of Southkamp Industries.

A full transcript follows the video.

This podcast was recorded on October 18, 2016.

Alison Southwick: Seth Jayson is co-advisor on Motley Fool’s hidden gems. He’s a long-time jerk, and he’s joining us today to help decode the quarterly earnings report. So I would describe you as someone with a low BS tolerance. Can I say BS?

Seth Jayson: Yes why not?

Southwick: So, with earnings season upon us…

Jayson: Love at first sight…

Southwick: … you are the perfect candidate to help us decipher what companies are really saying or not saying.

Jayson: Mm-hmm…

Southwick: So, I hope you think it’s a compliment that I think you have a low BS counter.

Jayson: Yeah yeah. You know, in any organization, this leads to career-limiting changes from time to time. But in general, I’m proud of that.

Southwick: So first of all, bro, why is there an earnings season? What is the problem ? I know it comes every three months?

Robert Brokamp: Law.

Jayson: After the gains mature.

Brokamp: Listed companies must therefore report their profits quarterly. Every three months, the results are published, and then generally, the company publishes a report. They might have a conference call or something. Most businesses, their fiscal year follows the calendar year. Some don’t. The federal government doesn’t start its fiscal year until October 1, but most companies follow the calendar year, which means that four times a year the majority of companies publish their results. So it’s a kind of deluge of information to go through. and, in our case, writing and analyzing.

Jayson: Yeah.

Southwick: If we want to decode and decipher an earnings report, we might as well watch one, and therefore examine how Southkamp Industries fared for the third quarter. Moving on to Steve Broido with Fool News Network.

Steve Broido: Southkamp Industries missed analysts’ expectations for third-quarter results. Net income fell 5% to $1 million, or $0.50 per share. Analysts had expected $1.2 million, or earnings per share of $0.52. Revenue fell 2% to $5 million. Southkamp Industries also adjusted its forecast, sending the stock soaring after hours. Chairman and co-founder Robert Brokamp said on a call with analysts that weather conditions impacted sales this quarter. Brokamp also pointed to one-time charges for a restructuring as it transitions New Hampshire facilities from loofah production to meet growing demand for whiskey in the state. Overall, Brokamp was optimistic about long-term growth – dynamic scale disruption synergy. These are words. Also cloud and social media.

Southwick: OK, it’s really compelling there, and there’s a lot to unpack. So, let’s start at the top and go sentence by sentence. What does Southkamp Industries say in this quarter’s earnings report?

Broido: Southkamp Industries missed analysts’ expectations for third-quarter results…

Southwick: What does it actually mean to miss analysts’ expectations?

Jayson: Well, usually everyone knows what the business is supposed to show in terms of revenue or profit and profit. And that’s because the group of analysts on Wall Street who talk to the company all the time, and look at what the company says when they say, “Hey, we think we’ll win between this and that, we will sell between so and so.” Analysts make estimates. There may be five or six. There may be three dozen, and a company like Thomson Reuters or S&P Capital IQ will take all of these, put them all together, eliminate any differences due to one-time items, and then work out an average. So that average number is the thing they’re going to miss or beat.

Southwick: How much stock do you put in it? Oh, no pun intended. Because the price of a stock will move.

Jayson: They will move a lot. I mean, a lot of sandbag companies. Apple sandbag for probably five years. It has always been offset by billions of dollars.

Southwick: And sandbag saying they’re coming in big, saying they’re gonna do badly but then they…

Jayson: Oh, we think we’re going to do a lot, knowing they’d do a lot better. Analysts would say, “Fine, we think they’ll do a lot better.” Then the number would be even better, and everyone would say, “Hooray!”

Southwick: Crushed!

Jayson: So here is. It largely depends on how much labor the company does to get that number where they want it to be for maximum BS-ness.

Southwick: Awesome. Let’s move forward in the article.

Broido: Net income fell 5% to $1 million, or $0.50 per share. Analysts had expected $1.2 million, or earnings per share of $0.52. Revenue fell 2% to $5 million.

Southwick: Earnings per share. Revenue per share. Sales per share. What is all this?

Jayson: So earnings — most companies don’t report earnings per share, of course. But earnings per share is what we ultimately get out of the stock, so it’s net earnings divided by the number of fully diluted shares, generally. So revenue and profit are usually compared to the prior year quarter, because that’s where it’s most comparable.

Businesses are seasonal, and a lot of businesses are going to do a ton of business during the holiday season, and it’s retailers and businesses like that. Companies that produce what is sold during the holiday season — perhaps their biggest quarters will be the quarter before the holiday season, when they sell the products that are going to hit the stores. So, in order to get the best comparison, you usually look at the previous year’s quarter.

So that’s the norm. You know, I had a robot — I call it a robot. It was an automated spreadsheet that I created at some point that was actually used to write the whole article.

I mean, he would input all the data, and he would find these sentences, and do all the comparisons like that. The reason I did this is that the robot would never mess up the calculations like I would if I did.

And those numbers that you were also comparing to the estimates. So analysts will have revenue estimates, and they will have earnings per share estimates. So those are the numbers we’re comparing.