Five Missteps to Avoid in Earnings Season(9)

Five Missteps to Avoid in Earnings Season(9) - Last...

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Last earnings season I presented my "Beginner's Guide to Earnings Calls." As a new earnings season kicks off, I want to delve a bit deeper into earnings calls by examining five common mistakes investors make when a company releases its earnings and conducts its quarterly conference call. Mistake 1: Relying Only on Headline Number(s) The run-up leading to the release of earnings is typically littered with analysts' expectations, which are disseminated to the investment world across a broad swath of the financial media. We sit in anticipation of the earnings release, that one metric that seems to hold the financial world in its balance. When the release is expected to be made public, investors, analysts and the media repeatedly hit the refresh buttons on their Web browsers, attempting to be the first person to obtain that data. Headlines begin to appear on Bloomberg screens, across the bottom of the CNBC screen, in "Columnist Conversation" on RealMoney.com or on Google Finance. With a headline, suddenly the world knows that XYZ Corp. earned 42 cents in the second quarter ended June 30. In after-hours markets, XYZ Corp. is getting whacked because the company was expected to earn 43 cents. A few minutes pass, and more tidbits of information come across the screen, telling the world that "based on non-GAAP results, XYZ earned 44 cents." (In some circumstances, new data such as this does not appear in any headline, and you can only ascertain it from a buried spot in the press release or during the conference call.) Suddenly the geniuses that sold XYZ are buying it back (and then some). The moral of the story is that headlines can be deceiving and you need to read the full text of the quarterly press release and listen carefully to the earnings call before rushing to judgment on the quality of the quarter (and the outlook for the future). Mistake 2: Not Considering the Future
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This note was uploaded on 09/04/2008 for the course FI 311 taught by Professor Booth during the Spring '06 term at Michigan State University.

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Five Missteps to Avoid in Earnings Season(9) - Last...

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