March 22: Hurricane Katrina and Projected Corporate Earnings

by David Jenyns on March 22, 2007

The effects of Hurricane Katrina on the stock market and overall economy are still yet to be played out. Katrina was the most costly storm in U.S. History. It is estimated to have an economic impact to exceed $100 billion. The human toll alone was in the thousands, in addition to the millions of dollars of property lost.

There are whisperings in some financial circles that a recession is in progress as a result of the disaster. If this happens, the impact of the storm will affect many more American citizens. Fortunately, most financial analysts are rejecting the idea that the country is experiencing the beginnings of a recession.

There are some real problems that have resulted from the catastrophe. The price of gasoline and diesel was almost immediately affected after the hurricane hit the Gulf Coast. Katrina damaged refineries, pipelines and port facilities in New Orleans and all along the Gulf Coast. This has resulted in higher energy costs across the board. Since petro-chemicals are used in the manufacturing of most products directly. Even those companies that don’t use petro-chemicals for manufacturing are indirectly affected by the price increase. The higher cost of gasoline has resulted in higher shipping costs. In many cases the higher shipping costs are being passes along to the customer.

Corporations, as well as consumers, will be taking a beating from rising energy costs throughout this winter. As a result, corporate budgets will have to be re-evaluated and this can mean less corporate earnings. Certain industries will feel the effect more than others. Those companies in the travel industry, such as hotels, restaurants and airlines, will feel the biggest pinch as consumers lose their discretionary income to spend on such luxuries. Discount retailers and other non-essential spending markets will also take a hit. Corporate earnings for these industries will be down.

On the other hand, energy and building material companies will stand to gain the most in this period. The corporate earnings in these cases will be positive.

What does this mean for the stock investor? Corporate earnings are one of the main ways that investors can determine the value of a stock. Everything a company does either adds to or subtracts from the company’s earnings report. The earnings or, more simply put, the profits of a company let investors and competing companies know how well a company is doing.

Investors look for companies with positive earning to buy stock from. In a few cases, however, a small or rapidly growing company may have a negative earnings report. This does not mean the company’s stock should be avoided. A corporate earnings report should be evaluated in context of the company’s history and current position.

In addition to showing actual earnings, a corporate earnings report can help create an expectation of earnings for a specific company. If a company has experienced a quarter of positive earnings, they may pay out a dividend to their investors so everyone benefits.

If a company is expected to have a positive corporate earnings report, their stock is often bought with anticipation of a dividend being returned. In some cases, companies are not able to live up to the expectation of earnings. This results in their stock being sold and losing its value. This is what is occurring when we hear that a company’s stock “fell” on the evening news.

To measure the amount of earnings, investors and brokers use “earnings per share.” The earnings per share value is determined by dividing the earnings by the number of outstanding shares. For example, if a company earned $12 million in any given quarter and had 8 million outstanding shares, the earnings per share for that company would be $1.50 ($12 million divided by $8 million).

Using the earnings per share price gives a more fair view of the market. If two separate companies made $12 million in one quarter they would appear to be comparable when using only that figure. If one company had 8 million shares and the other had 4 million outstanding shares, the investors in the latter company would profit more.

By keeping an eye on the corporate earnings in the aforementioned industries, investors can prepare themselves for bumps and declines that will be the result of the Hurricane Katrina disaster.

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