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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.
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