Corporate Earnings

The media discusses several topics and one frequently mentioned is the earnings report or earnings season. We hear Company XYZ beat their earnings or Company ABC missed their earnings. These are corporate earnings which simply indicate how much a company has made or lost during a specific period.Earning season begins one or two weeks after the last month of each quarter and are important in determining whether the company has sustainable growth and reasonable outlook for the long term.

Earnings are provided in a per share form (known as EPS) and distributed most commonly on a quarterly basis.EPS means earnings per share and each quarterly earnings distributed is added together to calculate the annual EPS.This annual EPS provides the full year outlook.These quarterly and annual EPS numbers are compared to previous year numbers so investors know how well the company is performing.For example, if Nike Inc. earned 17% more per share in recent quarter than a year ago (and they really did), you would think that Nike has potential for growth.

EPS is calculated by taking the revenue generated by the company and subtracting all expenses to get your net earnings.Take the net earnings and divide by the number of outstanding shares.If Nike’s net earnings were $500 million and they have 486 million outstanding shares, their EPS would be $1.02.The outline below shows a sample of quarterly and annual earnings history with expectations for 2011 and 2012.This is only one guideline reviewed when researching a company for sustainability and growth.

2008

2009

2010

2011

2012

Q1

25%

12%

1%

10%

8%

Q2

23%

13%

-5%

24%

5%

Q3

34%

8%

2%

7%

17%

Q4

14%

1%

7%

17%

8%

Year

21%

8%

1%

14%

10%

How do Corporate Earnings impact the market?Great question.Let me begin by saying that just because a company “missed” their earnings projection does not make them a bad investment.Companies may miss their earnings, meaning they expected to earn $1.02 per share and instead they earned $0.95 per share.It is well known in the investment world that companies get punished if earnings are not met, their stock price declines quite a bit. This can provide an opportunity to purchase the stock at a lower price knowing the earnings miss may recover during the full year.This being said, corporate earnings are a big factor in the health of the stock market and during earnings season the market becomes very active from all participants; investors, traders and analyst as they review their positions and take action where necessary based on the new data. Let’s take a look at 2011’s first quarter results for the S&P 500 below.

1QTR 2011 Earnings Season

Positive

Negative

Positive

Negative

Earnings Growth By Sector

Reported/Total

Growth

Growth

Growth

Surprise

Surprise

Surprise

499

/

499

39.83%

386

99

5.73%

359

135

> Energy

41

/

41

39.14%

26

15

8.38%

30

11

> Materials

30

/

30

37.84%

25

5

8.78%

20

9

> Industrials

60

/

60

21.88%

51

9

6.18%

44

16

> Consumer Discretionary

79

/

79

14.59%

65

12

2.22%

59

18

> Consumer Staples

41

/

41

13.98%

30

10

2.35%

29

11

> Health Care

52

/

52

7.21%

44

5

3.98%

44

8

> Financials

81

/

81

828.21%

65

14

6.29%

56

24

> Information Technology

74

/

74

24.17%

60

10

9.18%

62

12

> Telecommunication Services

8

/

8

-2.49%

3

4

-0.58%

2

6

> Utilities

33

/

33

3.76%

17

15

-0.60%

13

20

The ten sectors above identify the net results of all the company’s earnings. The overall growth for the S&P 500 was 39.83% with 386 companies reporting positive earnings and 99 companies reporting negative earnings.The Surprise column shows the combined companies all reported 5.73% better than expected with 359 companies reported to the upside and 135 companies missed their earnings expectations.Take a look at the financial sector showing 828.21% growth.Remember, this is year over year comparisons and the financials were coming out of the financial crisis last year so any improvement to the stocks would be a huge difference to the upside.The first quarter earnings for 2011 were strong and the S&P 500 returned 9.05% for the first four months on this year!There you go.

Where do earnings expectations come from?The management of the individual company reports their own expectations along with many analysts.Analysts do their own research to come up with their opinion for recommending a company.An analyst will have a Buy, Hold or Sell on each company they want to follow.Various expectations should be evaluated to form your own opinion or view.All these opinions come into play when earnings are reported as the results may lead to the analysts downgrading or upgrading their recommendation. These recommendations often have an impact on the stock price and sometimes the whole industry that the particular stock belongs to because investors may believe other stocks in that industry may report similar results.That is a short term view and keeping your long term view on companies is one of the keys to successful investing.

The media captures a brief detail on the corporate earnings results.And while the whole story may not get full coverage it is important to know what made up the company’s performance.

Good luck and know what you are invested in.

By | 2011-07-28T18:22:23+00:00 July 28th, 2011|Categories: Money Basics|Tags: , , , |0 Comments

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Articles attributed to "Guest Contributor" are written by former employees or invited guests. Contents are for your consideration only The opinions expressed herein are those of the authors and do not necessarily represent the views of Charter Trust Company. Nothing contained in this communication should be construed as investment advice.

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