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 Market Mysteries of the week

  How do I understand these CNBC articles talking about "beats" and "misses"?

Answer: Don’t get too caught up in the “beat” or “missed” language because it’s very short-term thinking. Look out for the higher-level trends of business growth and costs.What are you talking about?It’s earnings season! Isn’t that exciting?Public companies, those whose stock we can buy in the market, must report on their financial health every quarter. When you have thousands of investors, you need to be very transparent about your company.Most companies provide their reports in the first 3-4 weeks after the end of the March, June, September, and December quarters. That time period is called “Earnings Season,” and the reports are called “Earnings Reports.” Earnings is another name for profits.What are they beating or missing?Companies report on their performance for the quarter, and we compare it to what investors expected of them. Most of us in the financial industry spend our days analyzing data and making predictions about what will happen. Major Wall Street analysts will evaluate a company’s performance and make projections of how much revenue, profit, costs, users, etc., the company will have in three months.When you see a headline that PayPal “missed on revenue,” that means that it made $6.24B of revenue from selling its products and services over the last three months. Still, it was less than the $6.27B of revenue Wall Street analysts had projected on average. There are dozens of analysts and people making projections, so the “estimated” number is always an average of the major Wall Street analysts. It's up to you to decide whether you think that $0.03B revenue underperformance for the quarter is important for the long term.What are earnings?Earnings are profits. Investors look at Earnings Per Share (EPS) as a way to quantify how much profit the company is delivering relative to its stock price. It helps investors gauge whether they think the company is overvalued or not.There are a lot of other important terms that mean different things:Revenue is what they earn from the sale of their products and services.Profit margins are the difference between sales and expenses.Net income is another word for profit. It’s revenue minus the cost of doing business, interest costs on debt, and taxes paid.Some investors like to look at profits in different ways. Earnings Before Interest and Taxes (EBIT). They might not want to look at the interest costs or the amount of taxes because they’re outside of the core business control or have varying relevance across industries. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). They might cut out things like depreciation because it can be portrayed differently based on accounting styles.What guidance are they talking about?When you hear “guidance was light/low/weak,” that means the company gave a pessimistic outlook for the next quarter.Usually, as part of the earnings report and following conference call, companies will provide their own projections for sales, profits, etc. Wall Street analysts will then compare those projections for the next quarter to their own projections as well. So they’re not just looking at whether the company’s actual performance “beat” or “missed” their expectations, but also whether the company’s own projections “beat” or “missed” their projections for the next quarter.Companies like Apple or Facebook might report huge profits and revenue for the quarter, exceeding the expectations of Wall Street analysts, but still see their stocks fall because they warn that the next quarter might see an unexpected slowdown. Don’t place too much weight on whether a company delivers 0.4% less revenue in a given three-month period than the average of a bunch of projections or on the direction the stock moves immediately before/after the news. Use the information to evaluate whether you think the company is still moving in the direction you expect long term. Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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