Page 277 - How to Make Money in Stocks Trilogy

C = Current Big or Accelerating Quarterly Earnings and Sales per Share 155

regardless of any temporary, highly speculative “bubbles” or euphoria. Of
course, you never buy on earnings growth alone. Several other factors,
which we’ll cover in the chapters that follow, are also essential. It’s just that
EPS percentage increase is the most important.

Watch Out for Misleading Earnings Reports

Have you ever read a corporation’s quarterly earnings report that went like
this:

We had a terrible first three months. Prospects for our company are turning
down because of inefficiencies at the home office. Our competition just
came out with a better product, which will adversely affect our sales. Fur-
thermore, we are losing our shirt on the new Midwestern operation, which
was a real blunder on management’s part.
No way! Here’s what you see instead:

Greatshakes Corporation reports record sales of $7.2 million versus $6 mil-
lion (+20%) for the quarter ended March 31.
If you’re a Greatshakes stockholder, this sounds like wonderful news. You
certainly aren’t going to be disappointed. After all, you believe that this is a
fine company (if you didn’t, you wouldn’t have invested in it in the first
place), and the report confirms your thinking.
But is this “record-breaking” sales announcement a good report? Let’s sup-
pose the company also had record earnings of $2.10 per share, up 5% from
the $2.00 per share reported for the same quarter a year ago. Is it even better
now? The question you have to ask is, why were sales up 20% but earnings
ahead only 5%? What does this say about the company’s profit margins?
Most investors are impressed with what they read, and companies love to
put their best foot forward in their press releases and TV appearances.
However, even though this company’s sales grew 20% to an all-time high, it
didn’t mean much for the company’s profits. The key question for the win-
ning investor must always be:

How much are the current quarter’s earnings per share up
(in percentage terms) from the same quarter the year before?
Let’s say your company discloses that sales climbed 10% and net income
advanced 12%. Sound good? Not necessarily. You shouldn’t be concerned
with the company’s total net income. You don’t own the whole organization;
you own shares in it. Over the last 12 months, the company might have
issued additional shares or “diluted” the common stock in other ways. So