Earnings season is about to start

Here are some suggestions on how to write earnings stories:

It’s important to note that a company can use its earnings releases to put a spin on its performance. Sometimes a company will emphasize strong growth in revenue or sales to mask the fact that it spent a lot of money in the quarter on advertising or something else, making earnings lower than expected. Other times, companies will trumpet strong earnings growth despite weak sales.

That’s why the business reporter needs to look at the complete picture in an earnings release. While Wall Street analysts and investors will primarily focus on whether the company “made� its earnings projections, a better story may be told by looking at the overall performance of the company.

Because a company issues more stock, or often repurchases stock, to make its net income per share figure grow at a faster rate than its net income, it’s a better barometer of a company’s earnings growth to measure the percentage gain in net income, not in net income per share.

A business reporter should not fall into this trap, but focus on the growth or decline in the dollar amount noted in net income.

Other industry barometers are also important in earnings release. For retailers such as Home Depot and Wal-Mart, many experts like to measure their success by comparable, or same-store, sales, a figure mentioned in the first paragraph of the Home Depot release. This tells someone reading the release how sales have done at a retailer’s stores that have been open for at least a year.

Other industries have similar measures of performance that a business reporter will want to look for in the earnings statement. A beverage company such as Coke and Pepsi will report an increase or decline in the number of cases of soft drinks it sold during a quarter. Anheuser-Busch and Coors report a gain or loss in the number of barrels of beer sold during the quarter.

Look for future earnings guidance in the release. Earnings guidance is important for business writers to track because the stock prices of companies can rise and fall dramatically based on the release of this information. Anytime a company issues a statement telling what it expects to report in earnings for a quarter or a year, a business reporter should compare those numbers against Wall Street expectations, and against earlier guidance given by the company.

The reasoning is simple, but important. If a company is issuing earnings guidance that is higher than it has previously stated or higher than Wall Street thought, its stock price is likely to rise that day. Many investors base how much they’re willing to pay for a stock by how much a company is expected to report in earnings that year. If the company now expects to report higher earnings, then investors will be willing to pay a higher price for the stock.

The reverse is also true. If a company discloses that it expects to report earnings lower than it previously thought or that Wall Street estimated, then the stock price is likely to fall. A business reporter’s story on the release of new guidance should emphasize why the earnings estimate is now changing, for the good or the bad. In most cases, the reason is that the company’s business is performing better than expected, or worse than expected.