Let’s congratulate Apple and Steve Jobs today. Apple gave Wall St. a clear message today with an earnings report that blew away analysts’ estimates. Before I say any more about this, you surely want to know what quarterly earnings are and why the are important to you.
If you don’t get a report card maybe your children do. If not, then think back to your younger years when, approximately 4 times per school year you had either collected praise from your parents or had some big explaining to do. There were expectations on you to perform and if you met those expectations, you were rewarded. If not, you were punished.
If you understand the concept of report cards, you understand quarterly earnings reports. 4 times per year, public companies publish a report of how well they did over the past 3 months. Large amounts of financial data are published but two numbers are regarded as most important: EPS, short for Earnings Per Share, and net income. EPS is the amount of money from a company’s earnings that are applied to each share of stock. Net income is simply the money made after expenses.
How do we know if the numbers are good or bad? First, by comparing to last year. We don’t want to see the numbers go backwards. Next, the Wall St. experts publish forecasts of what they think the earnings per share will be. The big name analysts’ views are averaged together and an estimate is made. (The analysts look largely at the forecast published by the company)
These forecasts are published very early so investors can buy shares of stock based on these forcasts. They expect to make at least the forecasted earnings so if a company reports earnings even one cent below the forecast, they get punished. If they report just one cent above the forecast, they get rewarded with more buying and a higher stock price.
Now that we know how these quarterly Earnings Reports work, let’s look at Apple. (Remember that even one cent above or below the forecast is a big deal.) The forecast for Apple was $1.39 per share. Today, Apple reported Earnings per Share of $1.78! This is a HUGE win for Apple. This report caused shares of Apple to go up 10%.
Apple wasn’t the only company today reporting better than expected earnings. IBM and Abbott Labs received great praise today as well.
So why does this matter to you? First, if you take the plunge and own stocks, mutual funds, or any investment that involves investing in companies, you will learn to read these quarterly earnings reports. It’s also important to understand that the reports of large, visible companies affect market sentiment. When companies report positive earnings, investors feel better about Wall St. in general. It’s one of the few objective measurements of how the market is doing.
Now, when you read in the paper about earnings reports of companies, you will know what they mean. Interestingly, following these reports, companies host a conference call where anybody can listen in to the explanations of the reports.
Finally, is it any surprise that Apple, a strong company with great management reported better than expected earnings? This is why we anchor our portfolio with great companies like this. The company stock doesn’t necessarily report the quality of the company.