Corporate events in the US market. How do they affect stocks??Various corporate events take place in companies from time to time, which can affect the share price. Consider the most popular corporate events in the US market, which an investor needs to know about.
Publication of reports
Most US companies report quarterly. Four times a year, the US market is reporting season, when reports follow one after another and investors can assess the current state of not only the company of interest, but also other representatives of the sector and related industries.
The reporting calendar can be found on our website under the tag "US reporting season". Usually, companies report in non-trading hours before the opening or after the close of the session. Respectively, market reaction can be assessed by the dynamics of quotes on the premarket or postmarket.
Key metrics in the report, that matter to investors and analysts, are the proceeds (revenue), earnings per share (earnings per share — EPS) and their change compared to the previous quarter and the same period last year.
The indicator itself is not so important., how much is its deviation from the market consensus forecast. If the actual value is better than the forecast, then stocks may react with growth. If worse, then fall. For example, at the end of April, Facebook shares rose by 7% during the trading session thereafter, as results for the 1st quarter 2021 G. turned out to be significantly better than expected.
Corporate events in the US market. How do they affect stocks??
Other metrics may be relevant to an individual company., for example, net debt, free cash flow, operating profit margin or EBITDA, etc.. This is already determined by a specific investment case. Usually analysts focus on them in their reviews., commenting on reports.
On the day the report is published, the company's management usually holds a press conference, where he comments on the results, answers questions and gives forecasts for the coming year. Information, voiced during a press conference, can also affect the dynamics of stocks. There are cases, when stock falls rapidly on the background of reporting, however, management comments bring investors back optimism. Then the quotes are restored and may be even higher than the levels before the report..
SPO and additional issue
Certain major shareholders may decide to sell part of the shares, to lock in profits. Or the company itself can sell its treasury or quasi-treasury shares.
Such a deal will be called SPO (Secondary Public Offering). Most often, applications from buyers for participation in the SPO are accepted as part of the formation of a special Books applications (bookbuilding procedure).
During the SPO, the number of shares outstanding remains the same, but there is an oversupply on the market, which may put short-term pressure on quotes.
Further SPO may be positive for the company, if, following its results, the number of shares in free float increases (free-float), liquidity and interest in securities on the part of index funds is growing. It can also be negative., if a decrease in the share of an individual shareholder or his withdrawal from the capital of the company may lead to a deterioration in corporate governance, e.g. dividend reduction.
SPO price matters. The deal can be made at a discount to the market price, so that investors are interested in participating in it, or with a premium, if the demand for securities is great and investors are ready to pay extra for the opportunity to purchase a large block of shares.
SPO with a premium may cause short-term growth in quotes. SPO at a discount, against, is likely to cause a short-term decline, and, the greater the discount, the more the price drop can be.
Do not confuse SPO with additional issue (FPO). In the course of the additional issue, the company issues new shares in addition to the existing ones, that is, the number of shares outstanding is growing. Usually, companies resort to additional share issues due to financial problems or to finance new projects in conditions of high debt.
An additional share issue is almost always bad for existing shareholders, as their share of the company's profits is diluted. Exceptions may be situations, when the attracted capital is planned to be used to reduce debt or to an attractive investment program. However, even in these cases, the first reaction of quotations may be a decrease, since there is no guarantee that, that debt will not grow again, and the investment program will bear the expected results.
Buyback and dividends
Dividends and share buybacks (buyback) are a way to reward shareholders, news about them can cause a positive reaction of quotes.
Dividends are part of the company's profits, which is paid to shareholders one or more times a year. If the company declares a higher than expected dividend, then the quotes react positively to the news, if lower - then negative. The company may have its own dividend policy, which presupposes pre-established rules for determining dividends, which makes her payments more predictable.
Buyback - procedure, when a company buys back shares on the open market or by collecting bids. When a buyback is sold in the open market, a large buyer appears in the person of the company, who pushes the stock price up with his purchases. After the redemption of the repurchased shares, the total number of securities in circulation decreases, and the share of each shareholder in the profit increases.
Read also: The whole truth about buyback programs
Buyback programs have become very popular with American companies in recent years. Buyback news almost always has a short-term positive effect on stock prices..
M trades&A
Mergers and acquisitions (M&A) may have a significant impact on quotes, therefore companies prefer not to divulge details until then, until concrete agreements emerge. After the publication of news about a potential transaction, stock quotes may rise or fall strongly, depending on whether, what exactly is going on.
If one company buys another, then its financial indicators are growing. This is positive for stocks., but it's important to understand, how will the calculation be made. Various options are possible, but we will focus on three key: cash purchase, debt purchase and exchange of shares.
In the first case, the business is bought for cash., which the company has accumulated in advance on its accounts. In this case, cash, who brought income at the level of a bank deposit, turn into an asset with good returns, which positively affects the company's profit and the value of its shares.
In the second case, the purchase is made using borrowed funds.. In this case, market participants will closely assess, to what extent such a purchase is justified and whether the combined company will be able to comfortably service the increased debt. The reaction of stock prices will depend on the consensus opinion.
Read also: M trades&A. Why do companies go through mergers and acquisitions?.
In the third case, the company can pay for the purchase with its own shares from the treasury package or specially issued during the additional issue. The exchange of shares is carried out in accordance with a certain conversion ratio. If the whole settlement is carried out using treasury shares, then the event has a positive effect on quotes. If an additional issue is carried out for the transaction, then investors will weigh the benefits of such a merger versus dilution. Market consensus will again influence stocks.
Exchange of shares is also possible within the framework of the merger, when two companies merge into one new. In this case, the shareholders of both companies receive shares of the new company in a certain proportion. For example, in May 2021 G. of AT&T and Discovery Agree to Combine Media Business. After the news of the AT&T at the premarket grew by 4,6%, while Discovery shares rose by 15%.
Consolidation And splitting up Shares
If a stock gets too expensive, so that private investors can trade it, then the company can split shares or split (split). In this situation, one existing share of the company is exchanged for several new ones..
An example would be Tesla and Apple shares.. In August 2020 G. split went in proportion 1 to 4 in Apple promotions. Holders received three more new shares per share. The same thing happened at Tesla., but with a factor 1 to 5. Stock prices formally declined, but the capitalization of companies and the shares of existing shareholders remained the same. Hereinafter, including due to increased liquidity, shares of both companies showed growth.
The opposite process is called consolidation or reverse split. In practice, this action is rarely performed.. With him, the share price is artificially increased, reducing the number of securities in circulation. This is done in order to, to keep listing on exchanges, as stocks that are too cheap may not comply with the listing rules.
Split and reverse split are in themselves neutral corporate events. Share price changes, but this change is artificial and does not bring profit or loss to shareholders. A split could have a positive effect on stocks by increasing liquidity and attracting more investors to trading. A reverse split can have a negative effect due to a decrease in liquidity. But if earlier shares were under pressure due to delisting risks, then after the announcement of the reverse split, the quotes may also receive short-term support.
