How to Read an Earnings Release

Four times a year, every public company you own puts out an earnings release. Most casual investors do not really dig into the detail when this happens. They quickly see if the company beat expectations and look to see how the stock moves.

If you want to learn about a company, its past and its projections for the future, you should truly read and absorb the information a company presents to you.

Reading an earnings release means understanding the story the numbers tell about the business. How revenue is trending across the different parts of the company. Whether margins are getting better or worse. What management expects for the next quarter and the rest of the year. And how events out in the world, fuel prices, currency, a supply chain problem, a war, are showing up as actual line items right now.

That is a different skill, and it is one of the most useful ones a regular investor can build. This post is going to teach it, using two companies that both reported this week.

Where this fits

This is the third post in a small series about the mechanics of owning stocks, and it builds directly on the first two.

In How to Research a Stock Before You Buy It, I walked through the framework, what to look for in a company before you own it and why each piece matters. In What Researching One Stock Actually Looks Like, I applied that framework to a single real company, Johnson & Johnson.

If you have read those, you already know why I own JNJ and what I was looking at when I decided to buy it. This post is the next skill. Once you own a stock, or you are seriously considering one, the company is going to report earnings four times a year. How do you read what they just put out and decide whether the story you bought into is still intact, or whether this is the final piece of information that leads you to make your first buy into the company.

I am going to use Johnson & Johnson to teach the mechanics, because you already have context on it. And I am going to use United Airlines for one specific lesson that a stable healthcare company cannot teach as well, which is how an event in the news becomes a number on a page months later.

One disclosure before we start, same as always. I own JNJ in my own portfolios. I am not licensed to give investment advice and nothing here is a recommendation to buy or sell anything. I am showing you how to read, not what to conclude. United I am using purely as a teaching example because it reported this week and it illustrates the point well.

What actually comes out each quarter

When a company reports, it does not put out one document. It puts out several, and each one is good for something different.

The press release is the headline version. This is what will hit the news first. If you happen to have CNBC on when a company releases earnings, they will share the main highlights seconds after the company shares the information with the press. The official release is a handful of pages, it leads with the numbers management most wants you to see, and it includes a quote from the CEO and/or other top management. This is what gets turned into the news articles you read. It is the fastest way to get the top-level picture, and it is also the most curated. Every company puts its best foot forward here, so part of reading it well is noticing what they lead with and what they are more vague about.

The 10-Q is the quarterly filing the company sends to the SEC. It is longer, it is dryer and it is far more complete. This is where the full financial statements live, along with the footnotes, the risk factors and the detail the press release covers at a high level. When something interesting is happening at a company, the press release hints at it and the 10-Q spells it out.

There will also be an earnings call held by management after the release, usually the same day. The CEO and CFO walk through the quarter and then take questions from analysts. The transcript is usually available within a day. Reading what management chooses to emphasize, and watching where the analysts push back, tells you things no table of numbers will.

Another aspect of an earnings release are supplemental tables/financial schedules or an earnings presentation. Sometimes these tables are part of the earnings release, sometimes they are separate and sometimes more detailed information is presented in an Earnings Presentation. This will give a deeper dive into the financials, often providing segment breakdowns.

You do not have to look at all of these every quarter. But you should know they exist, because when the press release raises a question, the answer is almost always sitting in one of the other documents.

Reading the numbers, using Johnson & Johnson

Let me walk through JNJ’s release this week the way I actually read one. As of the day I am writing this, these are the most recent figures. If you are reading later, the numbers will have moved, and that is the point.

Start with revenue. JNJ reported sales of $25.31 billion for the quarter, up 6.6 percent from the same quarter a year ago. On the surface, this is a good number. But the top-line figure by itself does not tell you where the growth came from, and that is what the segment breakdown is for.

JNJ reports in two segments. Innovative Medicine, which is the pharmaceutical business, came in at $16.38 billion, up 7.8 percent. MedTech, the medical device business, came in at $8.93 billion, up 4.5 percent. Right away you learn something the headline did not tell you. The drug business is growing faster than the device business, and it is also the larger of the two, so it is carrying most of the growth.

While this may start to be getting more complicated, I do want to bring up another number you will see: operational or organic growth. JNJ’s Innovative Medicine grew 7.8 percent as reported, but 6.8 percent on an operational basis, which strips out any swings that artificially affect the change. For JNJ a good example is the impact of foreign currency adjustments. Organic growth goes even further and strips out acquisitions and divestitures as well. Why is this important? If you are investing in a restaurant chain, growth might be up exponentially but that could just be because of new stores. Organic growth is how those stores that were opened performed. If traffic is down 20 percent, you want to know this.

A quick note if you read my JNJ walkthrough. You will remember that JNJ used to have a third business, consumer health, the Band-Aid and Tylenol brands. That was spun off as a separate company, Kenvue (ticker KVUE), back in 2023. So when you look at JNJ’s segments today, there are two, not three, and the consumer brands you grew up with belong to a different company now. This is exactly the kind of thing that trips people up when they read an earnings release for a company they think they know. The company you are reading about today is not always the company you remember.

Now earnings. This is where it gets interesting.

JNJ reported earnings per share of $2.27 on a GAAP basis, which is down slightly even though sales grew 6.6 percent. That is the official, accounting-rules number. I started my career with KPMG, a large accounting firm, and it was our job to attest to these numbers for a public entity, essentially to validate that what the company reported was accurate. EPS for JNJ was down less than one percent from a year ago. Hold onto that stat as we will address it shortly.

The company also reported an adjusted earnings per share of $2.90, which was up 4.7 percent. That is the number JNJ leads with, and it is the number the headlines used.

So which is right. Sales up nicely, one earnings number down, another up. What is going on.

GAAP versus adjusted, and why the gap is the whole story

This is the single most useful thing to understand about reading an earnings release, so I want to spend real time on it.

Companies report earnings two ways. GAAP earnings follow generally accepted accounting principles, the standard rulebook everyone has to use. Non-GAAP, or adjusted, earnings are the company’s own version, where management strips out items it considers one-time or not reflective of the underlying business.

The gap between those two numbers is not noise. It is management telling you what they want you to focus on and what they want you to ignore. Your job is to look at what they took out and decide for yourself whether you agree.

For JNJ this quarter, the adjusted EPS of $2.90 per share is higher than the GAAP number of $2.27. The biggest single reason is something called intangible amortization, a non-cash accounting charge tied to acquisitions the company made years ago. There is also litigation expense, restructuring costs and charges tied to a business separation. Management adds all of that back to get to the adjusted figure. They are attempting to give you an apples to apples view of earnings that truly reflects the growth or deterioration of operations.

Is this fair. It depends on the item, and this is where it gets more interesting. I believe it is as long as you are truly trying to take out non-recurring items. I do this monthly as CFO. I present a financial package with management notes that detail our earnings and I will highlight anomalies. That is what management is attempting to do with adjusted earnings.

These adjustments are applied to both quarters: the current quarter and prior year. So when JNJ says adjusted earnings grew 4.7 percent, it is comparing adjusted to adjusted, with amortization and litigation stripped out of both years, not this year’s adjusted against last year’s GAAP. That is a consistent comparison.

For many companies, you might argue litigation is non-recurring or very inconsistent. It can be large in one quarter and small the next, pulling it out of both sides actually gives you a cleaner read on how the underlying business is trending. The growth rate is not being impacted by the adjustment. That part is fair.

The harder question is not about the comparison but whether you agree these should be backed out. Intangible amortization is a non-cash charge, an accounting entry tied to acquisitions made years ago, and there is a solid case for looking past it. Litigation is a different animal for a company like JNJ. A company their size is always going to have litigation. It will continue for years if not forever. Those settlements represent true expense that will always appear on the income statement.

When a cost is genuinely recurring, labeling it one-time and excluding it means the adjusted number overstates the company’s earning power. That does not change whether JNJ grew this quarter. It changes what the company is worth. So the question you have to answer for yourself is not whether JNJ grew. It is whether, when you sit down to decide what this company is actually worth, you are willing to look past a cost that keeps coming back. Management made its choice when it put litigation in the adjustments. You can make the same decision or you might have a different view.

If you want to understand how JNJ’s GAAP earnings were down slightly while sales grew, you need to look past the earnings release. More detailed information from their filing shows the company paid a higher tax rate this quarter than a year ago, and spending grew faster than sales in a couple of categories. That is important information when you are making your own assessment of your investment. As CFO, I absolutely have to explain to management if our net income grew less than sales.

I want to point out that sometimes the adjusted earnings is higher than GAAP earnings. This is why I wanted United in this post. United also reported this week, and for United the relationship runs the other way. United’s GAAP earnings per share came in at $2.46, and its adjusted number was lower, $1.99. The company stripped out large one-time gains, mostly from aircraft sale-leaseback deals, to get to a more conservative figure.

Make sure you are clear on this before you move on. For JNJ, the adjustments made earnings look better. For United, the adjustments made earnings look more conservative. Same accounting concept, opposite direction. This is why you can never treat the word adjusted as a synonym for inflated, or assume the company is always trying to make itself look better. Sometimes they are smoothing out a bad-looking real cost. Sometimes they are pulling out a good-looking one-time gain so you do not mistake it for the ongoing business. Every quarter, for every company, two questions do the work. Which direction did they adjust (if any), and what was the reason. You are not deciding anything yet. You are noting it and reading on, because the direction and the reason are things you carry into the rest of the release.

Two quick cautions on earnings per share before we move on.

First, as discussed at How to Research a Stock Before You Buy It, EPS is earnings divided by the number of outstanding shares, so a company can report higher EPS without earning a single extra dollar, simply by buying back its own stock and shrinking the share count. The same pie cut into fewer slices makes each slice look bigger. It is not wrong, and buybacks can be a fine use of cash, but when EPS rises it is worth knowing how much came from the business growing and how much came from the denominator shrinking. Note, a buy back announcement will generally drive a stock price higher immediately. Why? Because investors know that move will increase earnings in the future.

Second, almost everything we have read so far, revenue, earnings and margins, lives on the income statement, the part of the release companies lead with. The balance sheet, where you watch debt rising or cash falling, and the cash flow statement, where you see whether the company actually generated the cash to cover its dividend and its buybacks, round out the picture. Both are a skill of their own and a post of their own. For reading the release itself, the income statement is where you start.

Guidance, and why it only matters over time

The next thing in most releases is guidance, which is management’s projection for the coming quarter and the full year.

JNJ raised its guidance this quarter. It now expects full-year sales of about $101 billion and lifted its adjusted earnings-per-share outlook. When a company raises guidance, it is telling you management feels good about where the year is heading. When a company cuts guidance, that is often more meaningful than the quarter’s actual results, because it is a signal about the future rather than the past.

Here is a detail in this particular release worth catching. JNJ beat the quarter by about a nickel, $2.90 in adjusted earnings against a $2.85 estimate. But it raised the midpoint of its full-year adjusted earnings outlook by more than double that. That distinction matters. When the size of the full-year raise is bigger than the size of the quarterly beat, management is telling you something specific. They are not just banking one good quarter. They are projecting the momentum to continue. A raise that only covers the beat is a shrug. A raise bigger than the beat is a statement about the rest of the year.

But here is the part I most want you to take away, because almost nobody talks about it. Guidance only matters over time.

Any single quarter of hitting or missing guidance is close to noise. A company can beat once because of a favorable currency swing or a one-time order. A company can miss once because a product launch slipped by a few weeks. One data point tells you very little. It should also be noted, some companies are historically very conservative with guidance allowing them to beat projections easier. This isn’t wrong. It is simply something you will learn over time.

What tells you something is the pattern. A company that sets guidance, hits it, sets guidance again, hits it again, quarter after quarter for years, is showing you a management team that understands its own business and does not overpromise. A company that keeps setting optimistic guidance and quietly walking it back is showing you the opposite. That track record, built one quarter at a time, is one of the most honest signals you can find about the quality of the people running a company.

Which is exactly why I am going to keep coming back to Johnson & Johnson. I already showed you how I research it. Now I am reading its earnings. Every quarter going forward, I plan to check JNJ’s results against what management told us to expect, and add the new quarter to the record. Over time that builds something a single post cannot, a real, running view of whether this management team does what it says it will do. If you own JNJ, or you are just using it to learn, you will be able to follow along with fresh material every quarter. That is the whole idea.

When news becomes a number, months later

Now the lesson the United earnings release taught us.

If you have been reading the Weekly Notes this summer, you followed the arc in the Middle East, the deal, the breakdown, the strikes and the ceasefire. I tracked it across Weekly Notes over several weeks. I am not going to re-narrate all of it here. If you missed it, the links are there.

Here is why it belongs in a post about reading earnings releases. Back in late February and into March, the Iran conflict sent oil prices nearly straight up. Brent crude went from around $72 a barrel to nearly $120 at the peak, one of the largest one-month moves in the history of the oil market. Then a ceasefire pulled prices back down, and most people stopped thinking about it. As I write this, oil sits around $82 per barrel.

Fuel is one of an airline’s biggest costs. So months after the conflict began, that spike is showing up in United’s earnings as a very large, very specific line item. United’s fuel expense for the quarter was up 84 percent from a year ago. For the full year, the company now expects nearly $6 billion in additional fuel costs compared to what it had planned at the start of the year. That is the news becoming a number.

Now watch how the company talks about it. In the press release, the CEO keeps it fairly neutral. He refers to when oil prices spiked in March and leaves it there. Companies almost never editorialize about geopolitics in a press release. But read down into the risk factors and the fine print, and United names it directly, listing the geopolitical conflicts in the Middle East as a fuel risk. The company also disclosed that it raised $3.7 billion during the quarter as a cushion against, in its own words, geopolitical uncertainty and the possibility of an extreme spike in oil prices.

So the headline says March oil prices. The reader who keeps reading finds the company naming the exact thing you watched happen in real time. That is the edge. The press release gives you the neutral, sanitized version. The event you already understood from following the news is sitting one layer down, in the risk factors and the capital moves. Connecting the two, the news you remember and the line item in front of you, is most of what separates reading an earnings release from simply skimming the data.

One more thing United shows nicely and that is how they responded to the increase in fuel costs. United said it recovered about half of the fuel increase in the quarter by charging more for tickets, and expects to recover 80 to 90 percent of it next quarter and essentially all of it by the end of the year. If you have had to travel recently, it is very obvious the carriers are passing the costs off to us consumers. They report to their shareholders. They have to do this.

There is one more number worth pulling out of all this, because the whole fuel story runs through it. A margin is simply profit measured as a share of revenue. United’s revenue actually rose 16 percent this quarter, which on its own sounds like a company firing on all cylinders. But its operating margin, the share of each revenue dollar left after the costs of running the airline, fell from 8.7 percent to 6.2 percent. Revenue climbed and the margin dropped at the same time, because fuel costs rose faster than revenue did. That is why it is important to look at margin, and not just the top line. A growing revenue number can sit on top of a business that is keeping less of every dollar it brings in. JNJ this quarter shared an opposing story, guiding its operating margin to improve over the year. One company is absorbing a cost shock, the other is getting more efficient, and the margin is where that difference lives.

The stock reaction is not the operational story

I know this post is getting long. I have been accused of being too long winded my entire life. I am the guy that gets cut off in the middle of a voicemail message because I talked too long. I want to cover one more topic though.

The stock’s reaction on the day of an earnings release is not the same thing as whether the company had a good quarter or bad quarter. Sometimes the market gets it right. Sometimes it badly overreacts in either direction. And a reader who has actually done the work of understanding the operational story is in a position to tell the difference, which is where the real advantage is.

A lot of the time the reaction is not even about the quarter. It is about expectations. The market sets a bar before the release and prices it in ahead of time, so a genuinely good quarter that only meets an already high bar can still sell off, and a weak quarter that clears a low one can rise. The number that moves the stock is the surprise against expectations, not the result by itself.

Take JNJ this week. The report read like a clear win, a beat and raised guidance, and the stock still fell about 2.7 percent on the day. Pause on that, because JNJ is normally one of the calmest stocks in the entire market when it reports. It is a low-volatility, defensive name. You will remember its beta of about 0.26 from the walkthrough, meaning it usually moves only a fraction as much as the market. It is a stock that gains on consistent execution over the years, not on any single quarter’s announcement. So when a stock built like that drops nearly three percent in a day, that is unusual, and unusual is a signal worth reading rather than reacting to.

So what changed. Read past the headline into the segments and you find a soft spot. The MedTech business, specifically its cardiovascular unit, came in light, with sales of about $2.4 billion against roughly $2.55 billion expected, on weakness in heart-pump sales. The overall company still beat and still raised, which is why the headline looked clean. But the detail underneath was not as clean, and the market noticed. We also already saw that reported GAAP earnings did not actually grow this quarter once you account for taxes and spending. And separately, defensive stocks like JNJ had been in favor for weeks and were rotating back out of favor right around the time it reported, which is market weather, not company news.

Two of those things are about the business and one is not, and telling them apart is important. Notice too how management handled the weak spot. Rather than gloss over the cardiovascular miss, the finance chief named it directly and called it an issue they intend to fix. How a management team talks about its own miss tells you something real. It is the same idea from the JNJ walkthrough: read the company, not just the numbers. A team that owns a problem out loud tends to fix it. A team that hides from it tends to repeat it.

None of this tells you to buy or sell. That is not the point. The point is that the reader who understood the operational story can now look at a three percent drop and weigh whether it is an overreaction, a fair response to a true issue, or something in between. The reader who only saw red on the screen is not weighing anything. They are just reacting.

United this week is the same lesson from a different direction……at least when the earnings were released. It also beat what analysts expected and also raised its full-year outlook, and yet its earnings were down sharply from a year ago because of the fuel bill, and its margins shrank. A higher-beta, more sentiment-driven name like an airline can swing much harder on a single quarter than a JNJ ever will, which is exactly why the same discipline matters more, not less.

I want to point out this was a challenging week for the stock market. A lot of red across the board so the reaction to an earnings release can be impacted by overall market conditions. Where JNJ and United sit at the end of the week may or may not have anything to do with their specific earnings.

If you want the companion skill on what to do with that judgment, I wrote about it in When to Sell a Stock.

Where to start

You are not going to become an expert reading one earnings release. Nobody does…… but you get better every single quarter you do it, and it compounds the same way everything else in investing does.

So here is the assignment, and it is a small one. Pick one stock you own or are seriously considering. Just one. Find its next earnings date, they are published for free on any finance site or simply ask Google. Put it on your calendar. When the release comes out, read the actual press release instead of the news summary. Look at the revenue, look at the segments, look at both the GAAP and the adjusted earnings and ask yourself which direction they adjusted and why. Then compare what management is guiding to against what they promised last time.

The first time, it will feel slow. By the fourth time, you will be reading the same company faster and with more understanding than most of the people who own it. And you will be making your decisions with your eyes open, which is the entire game.

Start investing. Stay consistent. Give your money time to grow. Cheers!

Christopher

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Full disclosure: I own Johnson & Johnson in my own portfolios. I do not own United Airlines. It is used here solely as a real-world teaching example to demonstrate how to read an earnings release. Nothing in this post is investment advice, a recommendation to buy or sell any security, or a solicitation of any kind. I am not a licensed financial advisor. Please consult a qualified professional before making investment decisions.