How Wall Street Works - Earnings & Stock Prices
Monday, September 03, 2007SUSIE GHARIB: The idea on Wall Street is to buy low and sell high. But how do you know if a stock is worth $1 or $100? That's a tough question and the answer depends mostly on one thing: the company's earnings. As Suzanne Pratt reports, Wall Street pays a lot of attention to how much money the firm is making and how much it has the potential to make.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: What happens four times a year in January, April, July and October and involves all US public companies? The answer: the release of earnings for the previous three months, known as quarterly earnings. For corporate America, it's the equivalent of children bringing home report cards and when the numbers come out it's considered earnings season.
CHUCK HILL, CHAIRMAN, VERTIUS ET LUX: During that time, there's a great deal of focus on the earnings releases, not just to see what the results are for the current quarter, but also a lot of the companies will make some comments about what they see for the rest of the year or for the upcoming quarter.
PRATT: Every three months, publicly traded companies are required by law to report their financial results to the Securities and Exchange Commission. Every company also issues its quarterly earnings report to the public and makes it available on the firm's web site. On the day of the earnings release, company management usually hosts a conference call for Wall Street analysts, professionals employed by investment firms to analyze public companies and rate the stocks. This was an earnings call for Schering-Plough, the pharmaceutical company:
ALEX KELLY, VP OF INVESTOR RELATIONS, SCHERING-PLOUGH: We appreciate you joining us at this our and apologize in advance to our investors in other time zones for the early start.
PRATT: During a call like this one, the company's CEO and other company officials field questions from analysts about the earnings news. But management also receives queries regarding other business areas.
FRED HASSAN, CEO, SCHERING-PLOUGH: It's important to get the basics of the message out. But it's also important to answer the concerns that might be out there on people's minds. It's really a dialogue with the investors and a dialogue with the stakeholders.
PRATT: The earnings conference call is usually posted on the company's web site and available to any potential investor. Still, small investors may find the earnings news complicated, particularly the plethora of numbers and financial terms. Net income, diluted earnings and operating income are some of them, all different measures of a company's financial success. The most-watched number is the firm's earnings divided by the number of shares of the company's stock, better known as earnings per share.
EDWARD NUSBAUM, CEO, GRANT THORNTON: For almost every company, the most important number is earnings per share, prepared in accordance with generally accepted accounting principles-- GAAP. And that needs to be disclosed and every investor should look at that number and compare it.
PRATT: Earnings reports also contain other crucial measures of a company's health. The revenue line, sometimes called sales, gauges demand for a company's goods or services. That's often a key to predicting future earnings. Predicting a company's quarterly earnings is an exercise that Wall Street takes very seriously. An unexpected number can lead traders to snap up or sell off the stock and that can have big consequences for the company's share price. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
