Stock Price Deviations Around Earnings Reports

    In anticipation of the quarterly earnings report, it is a common expectation for the price of that stock to rise. This is generally true in most cases and the example of this case would be Google. Google announced its earnings on October 17, 2013 which exceeded their estimated earnings and its revenue rose 36% which was equivalent to about $200. The major contributing factor to their success would be the company’s data analysis matching ads with the interests of the searcher/user. They make a profit for every click on these ads, thus it would make sense as to why they earned such a large amount this quarter. Investors, as a result, invested in the growing company and thus, the price rose substantially.

    The opposite effect holds true when a company does not too well expected. This usually occurs when poor performance of the company influences investors’ thoughts or sentiments about the company. Their confidence wanes and the probability of short-selling increases. The example in our case was that of IBM. They announced their earnings around the same time as Google, but it fell short when they were about one billion dollars short of expected earnings. The weak sales and shortage of staff gave investors little confidence about the future performance of IBM. As we can see in this case, the two driving factors influencing the stock price down would be the investor’s sentiment towards the company and the company’s poor expected earnings.

    While we expect there to be a correlation between positive earnings reports and increase in stock price there are also examples where unexpected results occur. It is possible that an earnings report that shows an increase in revenue can have no effect or a decrease in that stock’s price. This is because stock prices are driven by the investor’s future expectation of the company’s revenue and not on the current revenue, other information about the company can factor into the market’s demand for a stock, which in turn drives prices. The company HerbaLife published their quarterly earnings report on Tuesday and posted an increase in revenue of 44%. It is argued that this increase is because of the increase in overall demand for their products, however William Ackman of Pershing Square Capital argues that the company is a pyramid scheme and the company made a bet that their stock price would fall. This public battle surrounding the company has deterred many investors from going long on HerbalLife; the stock price has remained somewhat stagnant around such a positive earnings announcement.

The converse of this case is the negative unexpected case; where a report of a decrease in revenue can actually be correlated with an increase in stock price. This also is because investors trade on what they believe will happen to a company’s revenue in the future and not on what the company is currently earning. An example of company that underwent this phenomenon is the pharmaceutical company Pfizer; on Tuesday an earnings report was published that earnings declined 19% last quarter. However, Pfizer’s stock price actually increased in the stock exchange because the earnings report also published that there were going to be fewer budget cuts to Pfizer’s drug research and development sector. Investors believed that his change in company policy will lead to larger revenue in the future from new prescription drugs. While positive earnings reports can also benefit a company’s stock price; it is not always the case as investors trade on all current information and not just revenue.