The following type of report occurs each quarter as firms announce their earnings:
Weaker-than-expected results last week from Exxon Mobil have set a gloomy backcloth for results on Thursday from Royal Dutch/Shell. A consensus of Wall Street analysts polled by Thomson Financial/ First Call had projected ChevronTexaco would report earnings of 70 cents per share. However, the company said that after excluding special items and merger-related expenses in both periods, operating earnings were $931 million (88 cents). Using that math, the company beat the analysts’ figure by 18 cents. The company said it lost $154 million in the first quarter, compared with the year-ago quarter, in refining, marketing, and transportation operations. The company said its profit margins in that sector were at their lowest levels since the mid-1990s. Chevron stock closed up 90 cents, to $85.90, yesterday on the New York Stock Exchange.
(a) Why does the stock market react to earnings reports?
(b) What do the earnings reports mean?