[CANSLIM] Re. Earnings

From: Spencer48@aol.com
Subject: [CANSLIM] Re. Earnings
Date: Thu, 18 Apr 2002 11:06:35 EDT

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People:

     I'm not sure who asked about the "validity" of earnings, but I just read 
an article on earnings (by the OnLine Investor) that might prove helpful.  
jans  

"Earnings:
Look A Little Deeper
April 12, 2002 - Earnings for a company can come from various sources. 
However, there are three ways that really count: operating earnings, cost 
cutting or a combination of the two. This earnings season, which will be 
watched more closely than any in recent history, make sure you look behind 
the headline number to find out how the earnings were made.

A company can announce some great earnings, but the stock can still go down. 
Usually that's because those earnings came from a one time event called an 
extraordinary item. While the company will announce those earnings, most 
reporting services don't publish that number. Rather they give the operating 
earnings. Those are the earnings the company produced from the ongoing 
business, not from sales of assets or subsidiaries. Another reason for a dip 
in the stock in spite of better earnings: the company will give a poor 
outlook, suggesting that earnings won't be improving.

The ongoing earnings are the ones you want to focus on this quarter (and in 
the future). And, just as important, you want to look at revenues as well. If 
you only have earnings increasing without a revenue increase it means the 
earnings are coming from cost cutting. That's fine for a while, but earnings 
can't continue to grow if they only come from cost cutting. There is an 
absolute limit to how much a company can cut costs before it hurts rather 
than helps the enterprise.

What you would ideally like to see: an increase in revenues and an even 
better increase, in terms of percentages, in earnings. For example, if you 
saw a company that reported an increase of 5% in revenues and an increase of 
10% in operating earnings (with no extraordinary items), you would know that 
sales are increasing and the company is getting more efficient as it grows. 
That's the powerful one-two punch that growth investors want to see: growth 
in sales with better growth in earnings. It means that as the company gets 
larger, it will also get more profitable. At some point, that stops, but good 
growth companies can go on like that for years.

There will be a lot of earnings coming out in the next three weeks. There 
will be lots of buzz, anguish and some pleasant surprises. When you start 
looking at your companies, make sure you look a little deeper than just the 
announced number. If you can see better revenues along with even stronger 
earnings, then your company is doing something that most others can't in this 
economy. That should make it a very worthwhile company to own.

- -Ted Allrich"



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