One More Week in the Second Quarter

It's hard to believe that 2007 is nearly half over. In mid-July, the flood of second quarter earning reports will begin: first as press releases and then as 10-Q or 10-K filings.

For example, the initial reports for INTC and MSFT are due on 17 and 19 July, respectively. PEP's report is due on 24 July; TDW is scheduled for 26 July. NOK, which doesn't have to trouble itself with a 10-Q, reports on 2 Aug. Over the next few weeks, we'll let you know what we're expecting to see in these and other reports.

If possible, we perform preliminary analyses, estimating the gauge scores, with the data in the press releases. Then, we update the scores when the full set of data filed with the SEC becomes available.

The degree of correspondence between the initial reports and the ones that count varies widely from company to company. Firms obviously focus on early preparation their Income Statements because these rarely change in material ways from the initial announcements to the formal submittals. However, the first reports can be missing significant Balance Sheet and Cash Flow details or might even omit these important statements in their entirety.

While waiting for the 10-Q, we will fill any gaps in Balance Sheet details with values from the previous quarter. This approach is generally reasonable, except we lament the lack of up-to-date manufacturers' inventory data. We like to scrutinize inventory data in search of quarter-to-quarter changes in demand or production.

Missing Cash Flow data is harder to manage because it seems to vary more from quarter-to-quarter (new item for the task list: compare standard deviations for income and cash flow). We'll crudely estimate Cash Flow from Operations by adding Depreciation to Net Income and then making some adjustment that reflects how these parameters have correlated historically for the subject company. (A change in the relationship between these parameters can be useful information about earnings' quality).