Earnings reports: beats, misses and 'adjusted' numbers
How to read earnings-day headlines, and why there are two versions of profit.
Report card season
US public companies report results every quarter, plus a fuller annual report, filed with the SEC (the US market regulator). Companies in some other countries report every six months. Around each report, you'll see headlines about the company beating or missing estimates.
Estimates (or consensus) are the average forecasts of analysts who follow the company. A beat means results came in above estimates; a miss means below. As you learned, prices react to the surprise, not just the result.
Guidance: the forward look
Many companies also give guidance: their own forecast for the next quarter or year. Guidance often moves the stock more than the results themselves. A company can beat this quarter and still fall if it lowers its outlook.
GAAP vs adjusted earnings
In the US, official results follow GAAP (Generally Accepted Accounting Principles), a standard rulebook. Many other countries use a similar rulebook called IFRS. Many companies also report adjusted (non-GAAP) earnings that leave out certain costs, such as restructuring charges or stock-based pay for employees.
Adjusted numbers can help show the ongoing business by stripping out one-off events. But companies choose the adjustments, and they almost always make profits look bigger. Stock-based pay, for example, is a real cost to shareholders. US rules require companies to show how adjusted numbers reconcile to GAAP, so you can compare. A big, persistent gap between the two is worth questioning.
A company reports GAAP net income of $80 million. It adds back $30 million of stock-based pay and $10 million of restructuring costs, giving adjusted net income of $120 million, 50% higher.
With 100 million shares, GAAP EPS is $0.80 and adjusted EPS is $1.20. If analysts expected $1.10 adjusted, headlines will say it beat. The GAAP picture is less rosy, and both are true at once.
Key terms
- Earnings estimate
- The average forecast of analysts for a company's results.
- Guidance
- A company's own forecast for upcoming results.
- GAAP
- The standard US accounting rules for official financial results.
- Adjusted earnings
- Company-chosen profit figures that exclude certain costs; also called non-GAAP.
Look at both the headline 'beat' and the guidance, and check how far adjusted earnings sit from GAAP.