The two most often cited financial metrics from a company’s quarterly results are revenue and earnings per share. When a company reports these figures, they are usually compared to the results from the same quarter in the previous year. This is referred to as year-over-year comparison.
Some companies, especially those that have a similar level of business throughout the year, may offer a comparison from the previous quarter. This is called a quarter-over-quarter or sequential comparison. This can be useful for companies, like consumer staples, that have consistent business regardless of the time of year.
For companies that are more seasonal in nature, the year-over-year comparison is the best way to gauge performance. For example, retailers’ best quarter is often the quarter that includes the Christmas shopping season. For these companies, comparing quarters on a sequential basis would not be appropriate as this quarter is likely the best of the year. Year-over-year comparisons can also show the impact an acquisition has had on the company.
When a year-over-year comparison is appropriate
To help illustrate this concept, consider the stock of Apple Inc. (AAPL, Financial). Depending on the trading day, Apple has the largest market capitalization of any U.S. company. It became the first publicly traded U.S. company to reach a $1 trillion valuation last August.
Apple is also a somewhat cyclical business. To start, the company often brings new products to market in September or October in hopes of capturing revenue during the upcoming holiday season. The company’s first quarter covers this season and is usually the best quarter of the year in terms of revenue and earnings per share.
In the first quarter of fiscal 2019, Apple earned $4.18 per share and generated $84.3 billion in revenue. Had investors compared this result on a sequential basis to the fourth quarter of fiscal 2018, earnings and revenue would have appeared to increase 44% and 34%.
Using a year-over-year comparison would have produced far different results. In the first quarter of fiscal 2018, Apple earned $3.89 per share and had total revenue of $88.3 billion. Comparing the most recent quarter to this quarter would have showed earnings grew 7.5% and revenue declined 4.5% year over year.
Returning to the most recent quarter, revenue from iPhone sales, which is the largest component of Apple’s business, totaled $52 billion. This was a 47% increase sequentially, but a 15% decline year over year.
Portions of Apple’s business performed well both year over year and sequentially in the most recent quarter, showing that even companies with cyclical results can produce consistent returns. Sales for iPads totaled $6.7 billion, an improvement of 17% from the first quarter of 2018 and a 64% increase from fourth-quarter 2018.
Using Apple as an example shows the importance of making the proper comparison when examining a company’s performance.
Year-over-year comparisons can show the benefit of an acquisition
Companies often pursue a course of acquisitions in order to help grow its business. These deals, if done properly, can be a material benefit to the acquiring company.
On July 18, 2017, McCormick & Co. (MKC, Financial) announced is was acquiring Frank’s Red Hot, French’s Mustard and other condiments from Reckitt Benckiser (RGBLY) for $4.2 billion. The cost of these products, known as RB Foods, was deemed expensive by the market. Shares of McCormick declined more than 6% the day the deal was announced.
Investors who were able to look past the price tag for a collection of condiments could see McCormick was purchasing quality assets. For example, Frank’s Red Hot is the top-selling hot sauce in the world while French’s Mustard maintains the top position in its own category.
The fourth quarter of fiscal 2017, which ended Nov. 30, was the initial quarter to fully include the RB Foods acquisition. Earnings per share totaled $1.54, which was a 21% increase from the prior-year quarter. Revenue grew almost 22% year over year to $1.5 billion.
The first four quarters to fully include RB Foods combined to earn $4.84 per share and totaled $5.4 billion in revenue. These results equated to a 22% increase in earnings per share and an 18% increase in revenue compared to the previous four quarters. While some of the earnings increase was attributed to a lower tax rate, much of this growth came squarely from the acquisition of RB Foods.
To help give the impact of RB Foods more context, McCormick’s earnings per share for the four quarters predating the acquisition were $3.97 and revenue totaled $4.6 billion. Earnings per share improved 7% while revenue was more than 4% higher from the year-ago period. While these totals were likely above the results of most companies in the consumer staples sector, they were nowhere near McCormick’s growth rate in the full year following the addition of RB Foods.
McCormick was producing mid-single-digit earnings and revenue growth prior to the addition of Frank’s Red Hot and French’s Mustard. After the addition of these products, the company's top and bottom lines improved by high double digits, something very few other companies in the sector could produce. Despite the drop in share price the day of the acquisition announcement, RB Foods has proven to be very successful for McCormick.
Conclusion
Using year-over-year comparisons for financial figures such as earnings and revenue can help investors see how a company has performed against the same period in previous years. Using this method to evaluate a company’s performance helps account for the seasonality of certain types of businesses.
If an investor performed a sequential comparison of the Apple’s first-quarter 2019 to that of the fourth-quarter 2018, they would have come to the conclusion the company had a quarter that showed incredibly high rates of growth. In actuality, the most recent quarter produced mixed results when compared to the comparable period of the year prior.
At the same time, year-over-year comparisons can also help investors see the impact an acquisition has had on the company’s financial results. The benefits of RB Foods for McCormick can be seen in the company’s financial results in the first four quarters following the completion of the acquisition. McCormick went from single-digit growth to double-digit growth almost immediately.
These two examples help show why using a year-over-year comparison for many financial metrics is most appropriate for evaluating a company.
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