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Earnings Report Can Affect Stock Prices

Unexpected Results May Spell Disaster

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Every quarter companies report their financial condition to investors. The most important number analysts, investors and the media focus on is earnings.

There is a constant push for most companies to grow (increase) earnings from quarter to quarter. When a growth company quits posting gains from quarter to quarter, investors may lose confidence and sell causing the stock to drop.

This focus on constant growth in revenue and earnings can encourage management to take actions that are beneficial in the short-term, but may have a negative impact in the long term.

Some managers of young companies have regretted the decision to go from a private company to a publically-traded one. Even privately-held companies face scrutiny from initial investors, but nothing like the intense attention a public company must deal with.

That attention may divert management's focus away from doing what's best for the company long-term to satisfying "Wall Street."

On the other hand, some senior managers' compensation is tied to the stock's price, so it is in their best interest to take those steps which tend to bump up share price.

Earnings season is a term you'll hear or read with some frequency during the year. It refers to the period following each quarter when companies are required to report their "numbers." The market always approaches the earnings season with caution because of the uncertainty and the market can't stand uncertainty.

Companies that hit or, better yet, exceed their number may see their stock rise. The market may hammer companies that fail to meet their number.

Industry Leaders

For industry leaders, the numbers come out in the form of estimates ahead of the actual report. If an industry leader stumbles on their numbers, you might see the whole sector suffer.

The earnings season occurs when a large number of companies report their quarterly profits or losses to the public. Market analysts follow major companies and estimate what the earnings number, reported as earnings per share or EPS, will be.

Some of the analysts have financial relationships with the companies they follow. There have been charges that earnings estimates where manipulated in the company's favor.

Many companies also provide "earnings guidance," which is management's estimate of what the company will do in the future. There are rules and regulations about what they can say, but plenty of wiggle room that some in the industry say is too much and boarders on manipulation.

Controversy

There is some controversy over earnings guidance. Some in the industry believe the practice of management offering a picture of how a company may perform in the future helpful.

Other industry professionals believe the practice allows management to use misleading information about future events to prop up stock prices. For example, a company president might indicate earning would be lower than they actually are, so when the numbers come in over the estimate, the stock price may rise.

"Whisper estimates" are another source of earnings estimates, although very unofficial. Some come from company insiders, while others come from a consensus of sophisticated investors. They claim to be unbiased; however, there is no way to know the source of many of the whisper numbers reported on the Internet, so use caution.

What Does Earnings Season Mean to You

Earnings season focuses attention on very short-term goals, which is usually not of concern to a "buy and hold" investor.

However, if you are a more active trader, earnings season can be a time of some volatility, either up or down for particular stocks and/or sectors.

If you are interested in which companies are reporting earnings in the near future, you can find a calendar on Yahoo!Finance that gives you the reporting date, a mean estimate from analysts and what the company's EPS was one year ago.

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