Monday, May 18, 2009

Ignoring The Headline Number

When quarterly earnings reports are released, investors tend to focus on the headline numbers. Were earnings 12 cents per share or 11? What does this mean for next quarter's earnings? For long-term investors, the discussions that follow these questions are essentially useless. Long-term investors want to know how the business is doing, and must therefore train themselves to ignore what may be important to speculators.

Consider Canam (CAM), an industrial manufacturer involved in large-scale construction projects. The headlines read that earnings in the most recent quarter fell by 30% year over year, suggesting the company is being battered by the recession. A closer look at its income statement reveals a very different story: sales are up 11%, and operating earnings are up about 10% over last year. The earnings shortfall is mainly due to a non-recurring tax difference between this year and last year, and after-tax losses (compared to after-tax gains last year) of a company in which Canam has an interest.

Another important note missed by the headline number: order backlog is down about 10% from this time last year. While the current backlog of $280 million still represents about 1.5 quarters worth of sales, investors should keep an eye on this number going forward to avoid negative surprises.

Traders and speculators base their decisions on the headline numbers. Value investors must dig deeper to find out what the business is worth.

For a more detailed discussion of Canam as an investment opportunity, see this article. Though stock in Canam has risen more than 40% since we first discussed Canam as an undervalued investment, it still appears to offer long-term value.

Disclosure: Author has a long position in shares of CAM.

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