Stuart Shaw, CFA

Every quarter analysts and portfolio managers anxiously await companies to report this number: earnings per share. Stocks are rewarded for beating Street expectations and punished for disappointing.

Despite the scandals over the years, I believe most managements make every effort to give investors as true a picture of their company’s earnings as possible. Earnings per share is the accepted bottom-line measure of profit performance by the investment community. This one number is integral to a company and stock analysis, and here’s how to use it.

Find a company’s earnings per share on the Income Statement. Let’s go to the Internet. Type in the company’s website address. Click on Investor Relations to find the income statement in the annual and quarterly reports and SEC filings. Companies usually provide a five year and some times a ten year history in the annual report. Use the five and ten year histories to examine the long-term pattern of earnings per share. Is the pattern consistent growth, cyclical? Are there any deficits? Compare earnings per share from continuing operations and before extraordinary items to earnings per share including discontinued operations and extraordinary items. Are they close, or is the company always selling and/or restructuring operations and incurring extraordinary, or one-time, items that are really recurring – a possible clue that management might not have a good handle on where they want to take the company?

How does a company’s projected growth in earnings per share based on the Street’s consensus expectation compare to its industry and the market as represented by the S&P 500? Go to Reuters to find out. Enter the stock symbol at Quotes, click on Ratios on the left sidebar, and then click on Growth Rates.

Analysts go to great lengths to build elaborate earnings models leading to quarterly and annual earnings per share estimates. They usually check their assumptions with company management, and make adjustments accordingly. The consensus of these estimates, which effectively has management’s blessing at the time, becomes what investors expect the company to report. Find earnings estimates at Yahoo! Finance. Enter the stock symbol at Quotes, and then click on Earnings Estimates under Analyst Coverage on the left sidebar. Or, go to the Wall Street Journal Online. Enter the stock symbol at Quotes & Research, and then click on Earnings Estimates under Estimates / Ratings. Let’s look at General Electric. The company reported third quarter earnings per share of $0.49. The consensus estimate was $0.49 comprised of 18 estimates ranging from $0.48 to $0.50. GE is a complicated company with a diverse product line including consumer appliances, defense, finance, media, medical, and more. I find it interesting that all 18 analysts arrived at the same estimate.

Some analysts are independent thinkers, and develop earnings estimates that do not reflect the consensus. Focus on these high and low outliers and possible reasons why they may be right, leading to potential positive earnings surprises or disappointments.

Look at the trend of earnings estimates. Which way are estimates moving? Remember “the trend is your friend.” The Company Stock Risk Profile™ favors stocks where estimates are rising and penalizes a declining trend. Think about the key variables impacting a company’s earnings within the context of the Street’s current thinking. I bought Exxon in 2003 on the premise that the price of oil would rise, and earnings estimates, which were reflecting just the opposite at the time, would follow. (Disclosure: I currently own Exxon).

Earnings per share is the denominator in the Price / Earnings Ratio valuation measure. Use the lowest earnings estimate for a more conservative approach. I once worked with a very successful portfolio manager who did not have any confidence in forecasts. He used reported trailing twelve months earnings per share.

My experience has been that one earnings disappointment usually leads to another. Earnings disappointments either pre-warned or at the time of the earnings report, are warnings to sell. Also watch for management’s forecast of problems in future quarters even if the current quarter’s earnings are excellent. Compare reported earnings per share with analysts’ consensus estimates for the last four quarters. The Company Stock Risk Profile™ penalizes stocks for any negative earnings surprises versus consensus.

Use earnings per share, historical and estimated, as a key part of your research. It’s one powerful number.