The third-quarter earning season kicks off this week with the first reports from big banks and investors can expect many of the same themes and talking points seen earlier this year.
Instead of telling you what to expect, we want to guide you on how to get beyond the headline metrics to really see how individual companies and sectors are faring in the current challenging macroenvironment. That means not just looking at earnings releases, but scrutinizing the conference calls virtually every company holds with analysts, where some of the juiciest information can be found.
Some of what will be said on the topic, however, should be taken with a large grain of salt. That’s because many companies have taken advantage of the inflationary environment to raise prices more than costs and are raking in profits as a result. The report found companies in the consumer-price index’s main categories made some $6 billion more in profit in the first half of the year than in the year-earlier period, and increased spending on shareholder returns by $15.4 billion to a total of $62.6 billion.
Tyson Foods raised chicken prices by 20% in the past year, as net income in the first half jumped by 29% to more than $1.5 billion and the meatpacker spent $669 million on dividends and buybacks. Considering about 40% of the aggregate revenue of the S&P 500 companies is generated overseas, according to FactSet data, investors should expect companies to try to sugarcoat their results by highlighting results in “constant dollar” terms, which excludes the effects of currency translation.
Investors should keep in mind that the FactSet consensus of analyst estimates are based on total sales, not constant currency sales. So if a company provides forward guidance for sales growth on a constant currency basis, that shouldn’t be compared with analyst expectations. The oversupply of goods stemmed from companies initially stocking up amid concerns over supply chain constraints, followed by the slowing and changing of demand patterns as inflation and a slowing economy made consumers more cautious.
Action: Investors can monitor a company’s inventory situation by checking the balance-sheet section in their earnings reports. For example, a line item under the “Assets” section of Nike’s balance sheet showed that inventories for the latest quarter increased 44% from a year ago, after growing 23% the previous quarter and rising 15% the quarter before that.
But absolute spending volumes don’t tell the whole story, something the payments giants will admit. Visa and Mastercard know transaction amounts, but they can’t tell whether consumers are spending less on discretionary items due to inflationary pressures or opting for cheaper brands when they shop. Action: It’s worth paying attention to headline spending numbers, but investors should wade deeper to better understand consumer health.