Earnings #1

     Investors and analysts haven't been very friendly to companies reporting earnings lately. What are some of the factors that go into how the market reacts to a company's earnings? Company's missing or beating earnings estimates, whose estimates? For answers we have to go back to where earnings estimates are established and walk through the process right up to when earnings are announced.

    Most stock analysts at the major brokerage firms not only issue ratings on the stocks they follow, (Strong Buy, Buy, Hold, Under Perform, Sell), they also publish their best guess of the profits or loss a company will report for the current and future fiscal quarter and the current and next fiscal year. These earnings forecasts are generated by the analyst's perception of the industry and sector, along with earnings guidance directly from the company. The earnings estimates are compiled by a handful of research firms and published in databases that are updated daily. These research firms publish the high, mean, and low estimate. On any given day there will frequently be hundreds of earnings estimates issued or revised by industry analysts. These are the earnings estimates the actual earnings reports are compared. Since analysts can change their estimates at any time as they see changes in the sector and news from similar companies, the estimates can be constantly in flux.

    Meeting earnings estimates is not the only hurdle companies need to get over. Analysts also have an idea of the type of earnings and revenue growth they expect to see, and in some industries, there are other criteria the analysts are watching before they'll put their blessing on an earnings press release. In the retail sector same-store sales is an important figure to watch. In the dot-com sector the growth or decline in advertising revenue or the number of hits (visits) the site receives is considered an important indicator of future performance. Analysts are also reading between the lines of an earnings statement to see hints of expected future strong growth or wording that shows signs of a sales or earnings slowdown in future market conditions and investor sentiment effect how an earnings report is received. In a euphoric market only dreadful news jolts a stock price. In a nervous and jittery market the best news is received with a lukewarm reception and less than spectacular news can drop a stock price like a rock. Some companies will release preliminary earnings news prior to the actual earnings report. On the upside this is a way to bolster share price and toot their horn twice in one quarter, and on the downside companies will frequently warn of any anticipated shortfall. Earnings warnings are usually issued to minimize shareholder lawsuits.

    How an earnings report is received can be clouded by changes in accounting systems or a company's fiscal reporting period, sale of stock in another company, one-time charges, losses from discontinued operations, and acquisitions of other companies or spinning off a part of the parent company. How should an investor steer through the earnings report minefield? We'll address that next week.