Earnings, revenue not the same thing

 
Updated 6/26/2015 7:52 AM

Q: I recently noticed a company post quarterly results that featured earnings growing faster than revenue. Shouldn't those two items grow at a similar rate? -- W.A., Wilmington, Delaware

A: Not necessarily. Revenue (or "sales") is the top line of the income statement and earnings (or "net income") the bottom, with a lot happening in between. If a company's revenue holds steady over a few years, but it adds workers or factories, or spends more on advertising, its expenses will rise and its profits will shrink. When you see a company's earnings growing faster than its revenue, that suggests it's becoming more efficient and its profit margin is increasing.

 

Q: A company I'm invested in wants to issue more stock. Should I vote for or against that? -- F.B., Miamisburg, Ohio

A: Some would automatically vote no, because adding more stock can dilute the value of existing shares. For example, imagine that Chihuahua Channelers (ticker: YIPYIP), which helps people communicate with long-lost pets, has just 100 shares of stock outstanding, and you own 10, or 10 percent of it. Then it issues 10 more shares. It now has a total of 110 shares, and your 10 now represent only 9 percent of the company. The value of your shares appears to have dropped.

But consider why the company is issuing more shares. Sometimes it's just to facilitate a stock split or for employee stock options. If the additional shares are to buy another company in a well-structured deal, adding them may be a smart move. Perhaps the acquisition will add much more in value to your company than it's costing in additional shares. If a company uses the money raised to grow its business effectively, shareholders can still win.

Fool's School: Approach Annuities Carefully

Many annuities leave a lot to be desired, and some are worth running away from. Many times, it's the folks selling them, not the people buying them, who are making a lot of money. Learn more about annuities, though, because some can serve you very well in retirement.

In a nutshell, an annuity typically involves your handing an insurance company a big chunk of cash today, with it agreeing to pay you an income for a specified period, which can be a certain number of years or the rest of your life. Here are three broad categories of annuities:

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• Equity-indexed annuities: Beware of these. They might promise a "guaranteed" return based on the performance of an index, but it likely will be several percentage points lower than the index's. Worse, your gain is often capped. When the S&P 500 has a big year, perhaps surging 20 percent or more, you might collect no more than a 10 percent return. And that's before ridiculous fees. A well-built portfolio of stocks should easily trounce this tax-disadvantaged product.

• Variable annuities: These often sport high fees, iffy returns and brutal "surrender charges" if you need your money back. There are some tax advantages, but they won't necessarily compensate for the downsides.

• Fixed immediate annuities: These are basic, classic annuities -- you hand over a lump sum and get a specified income for the rest of your life. The best ones offer cost-effective insurance against outliving your money, and you can opt for ones that include inflation adjustments, too. They're worth serious consideration if you're near retirement and seeking guaranteed income.

Even if you think your nest egg is big enough, remember that you might not always want to be managing an investment portfolio or be dependent on an adviser. An immediate annuity -- or a deferred one that starts paying you at a later date -- might suit your needs.

                                                                                                                                                                                                                       
 

Annuities offer trade-offs, but they may be worth the peace of mind. If you're considering this option, seek low-fee offerings backed by highly rated insurers. We'll offer more details next week.

My Dumbest Investment: Caved and Lost

My investment club once had a member who liked to gamble with his personal investing money. He had been pumping all of his money, around $30,000, into a large trucking company, and that was his only investment before joining our club. It had been close to bankruptcy, and he was sure it had nowhere to go but up. He hounded the club about buying shares, and after a few months we caved just to shut him up.

At that time, it was a penny stock, trading around $0.50 per share. A few days after buying it, the stock jumped 25 percent and the following day it dropped about 28 percent. We had a stop order in place, calling for an automatic sale if the shares fell 25 percent, so that kicked us out of them. We only lost a few dollars, but it is the dumbest investment because we caved and bought a stock that only one member wanted. It was a small cost for a big lesson. -- J.R., Anaheim, California

The Fool responds: That company is saddled with a pile of debt and has been losing money for years, making it a risky proposition. Buying is fine if your research suggests a company is likely to grow, but buying to shut someone up isn't a great path to profits. (It was risky for him to have all his money in one stock, too.)

Foolish Trivia: Name That Company

I trace my roots back to 1906, when William Riley founded me in Boston in order to manufacture arch supports and orthopedic shoes. I produced my first pair of running shoes in 1938. By the 1950s I was handcrafting customized footwear, and customized sneakers are a big hit for me today. I'm now the only major company producing more than 4 million pairs of athletic footwear annually in the U.S. Over the years, my acquisitions have included the Dunham men's casual shoe brand and the Brine athletic supply company. I raked in $2.7 billion globally in 2013. Who am I?

Last Week's Trivia Answer

I trace my history back to 1938, when my founder opened The Green Frog luncheonette in Georgia. Today, headquartered in Orlando, Florida, I'm an $8 billion giant, encompassing the following brands: Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House. (I sold Red Lobster last year.) Through subsidiaries, I own and operate more than 1,500 restaurants, employ more than 150,000 people and serve more than 320 million meals annually. My sales top $6 billion each year, and my stock has averaged gains of 13 percent annually over the past 20 years. Who am I? (Answer: Darden Restaurants)

The Motley Fool Take: This Stock Isn't Walking Dead

If you'd like to make money in show business, consider investing in AMC Networks (Nasdaq: AMCX). AMC, once mainly a distributor of content, is now purchasing and/or producing it, with such critical and popular hits as "Mad Men," "Breaking Bad," "Better Call Saul" and "The Walking Dead." It has profited by selling multiyear streaming rights to those programs and recently sold rights to its upcoming spinoff, "Fear the Walking Dead," to Hulu.

Hulu's purchase is wide-ranging and also includes future originals screening on AMC channels such as IFC and Sundance and on network partner BBC America, in which AMC has a 49.9 percent stake. The resulting windfall could last several years.

The international upside might be even greater. Right now, AMC gets just over 2 percent of its cash flow from overseas sales. As the ratio gets closer to 50-50 -- and it likely will, because the international TV audience is far larger and AMC is doing more of its own international distribution -- AMC should see revenue and earnings accelerate, driving its stock value higher.

AMC Network's revenue has roughly doubled since 2011, and its net profit margins are in the teens, with revenue and net income growing by double digits over the past five years. With its P/E ratio in the teens, the stock is appealingly priced. (The Motley Fool recommends and owns shares of AMC Networks.)

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