Five Missteps to Avoid in Earnings Season

Income taxes vary from company to company, country to country and, yes, quarter to quarter. In fact, a small deviation in income tax rates can create a penny or more of EPS variance in either direction. Be sure that you normalize the impact of taxes when comparing results with other periods, guidance or consensus estimates.

Mistake 5: Not Accounting for Changes in Accounting

Accounting regulations are quite complex. From time to time, companies will adopt new accounting rules. This can cause a great deal of confusion among investors when reading quarterly earnings results and listening to conference calls. The implementation of new accounting rules can cause a relative discrepancy between the results of a current period and those of a comparable prior period.

A common investor mistake is to compare these two sets of results. So be on the lookout for reconciliations or pro-forma presentations to ensure that you have an apples-to-apples comparison when you analyze a company's quarter. A recent example of an accounting change that caused a great deal of anxiety was SFAS-123R (Accounting for Stock Based Compensation).

Earnings Homework

As you prepare for another blitzkrieg of earnings, here is some homework to keep you on your toes:

• Make sure that you read a company's entire earnings press release. Do not react to headline information before analyzing the company's quarter and its future prospects.
• Understand the company's guidance relative to the current results and expectations as well as management's history of providing conservative or aggressive outlooks.
• Understand the implications of recent accounting rule updates.