Tutorial: read an earnings report like an analyst
Shares do not respond to results. They respond to results versus expectations, and to guidance.
Understand why a company can beat expectations and still fall 12%.
How read an earnings report like an analyst works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The divergence that precedes most disasters
Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.
- 1
The beat is measured against expectations, not against last year
A company can grow profit 30% and fall hard, because the market expected 40%. The price already contains the forecast. You are not being told how the company did; you are being told how it did relative to what was already paid for.
- 2
Go straight to the guidance
The quarter just gone is history and history is already in the price. Guidance is the only genuinely new information in the release, which is why the share price so often moves on a sentence buried on page four rather than on the headline EPS.
'We are lowering full year guidance' undoes a wonderful quarter instantly, and correctly.
- 3
Check the quality of the beat
Did revenue grow, or did the company simply cut costs and buy back shares? Cost cuts and buybacks can manufacture EPS growth from a business that is not growing at all. It works, once. It cannot be repeated forever.
- 4
Read the segment detail
Aggregate numbers hide the story. A company can post flat revenue while its growth engine doubles and its legacy business collapses, which is an entirely different company from a flat one.
Ordinary. The market expects steady, unremarkable growth.
You can explain a share price falling on a beat without reaching for the word 'irrational'.
Read next
Shares do not respond to results. They respond to results versus expectations, and to guidance.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.