8 min read

E is for Earnings

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Hi there,

It’s #nationalparkweek, so we hope you were able to spend some time in the great outdoors in between racing to use up your last Bed Bath and Beyond coupons. Meanwhile, it’s been a busy week for the financial markets, so let’s get caught up:

  • Economy growing at 🐢 pace: Rising interest rates and inflation are taking a toll on the US economy, according to new numbers out this morning. Gross domestic product (GDP) rose at just 1.1% in the first quarter, far short of the 2% economists expected.
  • Debt ceiling jitters: As the US inches closer to its debt ceiling, economists are sounding alarms over the consequences of default if it were to happen, with essays and reports warning of a “spectacular debacle” and “significant volatility.” With no signs of a final deal in Washington, some investors are channeling their nerves into Treasuries.
  • Corporate report cards roll in: Earnings reports show tech companies Meta, Alphabet, and Microsoft achieved better-than-expected growth, boosting share prices. Meanwhile, McDonald’s, PepsiCo, and Kimberly-Clark saw rising sales as consumers remained willing to pay more for everyday basics like hamburgers, soda, and tissues — though customers may not be able to stomach rising prices for much longer. If earnings reports seem like an enigma to you, we break them down in our explainer below.
  • Trading trends: Retail investors (that’s all of us, BTW) snapped up $77.7 billion in equities and ETFs on US exchanges in the first quarter, according to Vanda Research data. And some investing trends of the pandemic era seem to be reversing — individuals are now putting more money into diversified funds instead of single stocks, trading less actively, and pulling back from riskier options.

If you are among those investors looking to diversify your portfolio with more stocks and ETFs, a couple of new rankings out this week might give you some ideas. The Wall Street Journal lists the Best ESG ETFs for investors who prioritize environmental, social, and governance issues, and Just Capital ranks 10 Companies for Environmental Performance.

We’ve got more news below. Have a great rest of your week!

News you can use

Graphic of news publication with headline of "News"
  • America’s most affordable electric car, the Chevy Bolt, is being discontinued later this year. The announcement from General Motors was expected since the automaker wants all its EVs to be based on its new Ultium battery technology, which the Bolt is not. GM is currently working with Toyota on affordable EVs priced below $30,000. Until then, the cheapest EV title will belong to the Nissan Leaf. In related news, Tesla is waging a price war and sacrificing profits.
  • Sustainability measures go hand-in-hand with financial performance, according to a new report. Bain & Company and EcoVadis looked at 100,000 companies, finding that those with more diverse executive teams, higher employee satisfaction, renewable energy usage, and sustainable supply chains also perform higher on financial measures like revenue growth and profits.
  • Don’t be a sloth, at least when it comes to your bank account. Axios reports that many consumers are leaving money on the table by keeping their cash in checking accounts that don’t earn interest (though they tout the benefits of lazy investing). It’s the perfect time to spruce up your savings and take a look at these other strategies for investing when rates are high.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions, and so you have useful resources at your fingertips, here are a few links to resources and past stories relevant in these turbulent times:

Figure in focus: 20%

Graphic of the number “20 %” with a stack of bars of gold surrounding it.

That’s how much the price of gold has risen in the last six months! The precious metal has been trending this year, and not because of the basic hoops everyone loves or the recent heist at Toronto’s airport where thieves made off with millions worth, although we look forward to the movie on that one. Google searches in the US for the phrase “how to buy gold” have hit their highest recorded level ever this month, according to The Wall Street Journal.

This spike in interest has been attributed to rising inflation (gold is widely considered a hedge against it) and recession fears. The Journal reports the banking crisis sparked a rush to so-called “safe” assets, and badly burned cryptocurrency investors are also seeking to diversify with the more tangible and stable gold.

If you’re considering adding some sparkle to your investing, keep in mind that experts recommend gold should make up no more than 10% of your diversified portfolio. A convenient way for most people to invest in it is with exchange-traded funds (ETFs) backed by physical gold, like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU). You may also buy gold bars, coins, or jewelry, but first check out our tips on investing in ethical gold.

How to read corporate report cards

Graphic of a computer open with a paper report in front of it and a magnifying glass in front of the paper.

When companies are listed on stock exchanges, and anyone can buy a share, the law says current and potential shareholders have the right to know exactly how business is going. Publicly traded corporations have to publish earnings reports every three months. It’s this transparency that gives investors like you the confidence to put their hard-earned money in the stock market.

We’re in the thick of corporate earnings season this week, with 180 S&P 500 firms — including Coca-Cola, Boeing, McDonald’s, and many of the tech giants (Alphabet, Meta, Amazon, Microsoft, Snap) — among those publishing their results for the previous quarter. The financial jargon and figures can be intimidating if you’re a new investor or even if you’ve been buying stocks for a while and math wasn’t your favorite subject. We want to help you understand these corporate report cards so you can gain more insight into public companies and make informed choices as you shape your portfolio.

Decoding earnings reports

We’ll start with the most important stuff: sales and profitability. At the heart of every business is a product or service sold for (hopefully) a profit. Earnings reports tell us how much money was brought in during the quarter and how much profit was left over after expenses. Here’s how that information is usually labeled:

  • Net revenue or net sales: This is the total income brought in through sales minus any returns, allowances, or discounts. Many companies break down revenue by business unit and geographic region.
  • Earnings or net income: If you take a company’s net revenue and further subtract all business expenses, like cost of production, interest on loans, and taxes, you’re left with the profit, otherwise known as earnings or net income. This is referred to as the bottom line of a business, and it can be negative if there was a loss. (Being unprofitable isn’t always the mark of an unsuccessful company. High-growth firms need to spend heavily and lose money for years, e.g. Amazon, but this data can provide insights on their “path to profitability.”)
  • Earnings per share (EPS): The profits divided by the total number of shares held by investors gives you the amount of profit/loss per share or EPS. Companies will mention basic EPS and diluted EPS; the latter is considered more accurate because it takes into account new shares that may need to be issued in the future for anyone promised some, like debtors or company executives. The price/earnings (P/E) ratio, which divides the stock price by EPS, is used to gauge whether a company is overvalued or undervalued by the market. It tells you how much investors are willing to pay for $1 of earnings, but it can be misleading when used on its own.

The changes in revenue and profit from the previous quarter and the same quarter a year ago tell us if things are headed in the right direction and how fast. The growth or decline is usually expressed as percentages in the earnings release. Investors can find even more details if they dig deeper, like:

  • Profit margin ratios: A company’s ability to convert sales to profits is measured by margin ratios. One of the most commonly cited is net profit margin, which is earnings (net income) as a percentage of net revenue.
  • Free cash flow: The cash flow statement tracks how money is moving in and out of a business. “Free cash flow” is what’s left over from the profits after all expenses have been covered, like employee salaries or equipment maintenance. This is an indicator of a firm’s health and potential to invest in itself and grow.

Mind the non-GAAP

GAAP is the accounting standard all US companies must follow, and it gives the most accurate look at their finances. Metrics labeled “non-GAAP” mean certain liberties were taken by the company to adjust those numbers and may make them appear more favorable.

What else can we learn from earnings?

Unless there is great uncertainty in the economy or at the company, management usually reveals how they expect the firm to perform in the coming quarter and the full year. This is known as “guidance” or “outlooks.” They also share their views on the company’s performance in a section titled “Management discussion and analysis.” You may also read about risks and new products and get important updates on subjects you care about, like sustainability goals, pay equity, employee retention efforts, plans for the company to repurchase shares, etc. Bank and retailer earnings tell us about the broader economy and consumer spending or saving habits. This year, bank earnings will be scrutinized for clues about the sector’s crisis.

How do stocks react to earnings releases?

Wall Street stock analysts get out their calculators and predict quarterly results before they are published, so investors usually have an idea of what’s coming. The average of all these expert forecasts is known as the consensus estimate. A stock may move higher or lower depending on whether the earnings are a positive or negative surprise.

Ok, so what are my first steps?

Follow along during earnings season using a calendar like this one. You will find earnings reports, also known as Form 10-Qs, on the investor relations page of all official corporate websites. If that sounds daunting, you can just read the company press release on the subject or business news coverage for all the highlights.

Soon after publication, a conference call to discuss the results is typically held with the executive team, investors, and equity analysts, a link to which you can also find on the investor relations page. This is your chance to hear directly from the top brass, like the CEO and CFO, and get a better sense of the direction the company is headed in.

We hope this introduction encourages you to delve (or dip your toe!) into earnings each quarter. Understanding how businesses perform will undoubtedly make you a better investor in the long run. If you have any questions or would like us to touch on another confusing topic, let us know!

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** FWIW team members own shares of Alphabet, Amazon, Boeing, Microsoft, Kimberly-Clark, and Tesla.

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