Corporate events: earnings reports, guidance, splits, buybacks and capital increases

What you will learn

• Which reports and disclosures listed companies publish and what to look for first
• Why changes in guidance often matter more than the reported quarter
• How stock splits, buybacks and capital increases change the number of shares and the value per share
• How to calculate the theoretical price after a rights issue and the value of a subscription right

Explanation

Earnings reports and disclosures

Listed companies in the EU publish an annual financial report and a half-year report; many also publish quarterly statements, depending on the stock exchange segment. Under the EU Market Abuse Regulation (MAR), an issuer must publish inside information that could significantly move the price as soon as possible; in Germany this is called an ad hoc notice (Ad-hoc-Mitteilung). Transactions by managers in their own company's shares must also be reported (directors' dealings).

The idea that markets react to the surprise against expectations, not to the absolute number, was covered in the macro course. For a company, read in this order: revenue and operating profit versus last year, free cash flow, any one-off items, and then guidance.

Guidance is management's own forecast, for example "revenue growth of 4–6% for the full year". A guidance cut (lower forecast) or guidance raise changes expectations for all future years, so it often moves the price more than the quarter itself. Guidance can be wrong; compare it with what management promised in earlier years.

Stock splits

In a stock split, every share is divided into several new shares. In a 4-for-1 split, a holder of 250 shares at €120 receives 1,000 shares at about €30. The value stays €30,000. A reverse split merges several shares into one.

Share buybacks

In a buyback, the company uses cash to buy its own shares, which are then usually cancelled or held as treasury shares. Fewer shares mean higher earnings per share (EPS), even if total profit does not grow. In Germany, a buyback generally needs an authorisation from the general meeting, usually limited to 10% of the share capital. A buyback creates value only if the shares are bought below their intrinsic value; buying expensive shares destroys value for remaining shareholders.

Capital increases

In a capital increase, the company issues new shares to raise money. This causes dilution: each existing share owns a smaller part of the company. In Germany, existing shareholders normally receive subscription rights (Bezugsrechte) to buy new shares in proportion to their holding; these rights can be excluded under certain legal conditions. The rights can be used or sold during the subscription period. The theoretical ex-rights price (TERP) is the average price of all shares after the issue.

TERP = (old shares × old price + new shares × subscription price) ÷ total shares

Worked example

Hypothetical example: Company K has 100 million shares at €20. It offers 1 new share for every 4 held at a subscription price of €16. Fees, taxes and price changes during the subscription period are excluded.

• New shares = 100 m ÷ 4 = 25 m. Money raised = 25 m × €16 = €400 m.
• TERP = (100 m × €20 + 25 m × €16) ÷ 125 m = (2,000 + 400) ÷ 125 = €19.20.
• Value of one subscription right = old price − TERP = 20.00 − 19.20 = €0.80. Check: (20 − 16) ÷ (4 + 1) = €0.80.

An investor holding 400 shares (€8,000) has three choices:

• Subscribe: pay 100 × €16 = €1,600, then hold 500 shares × €19.20 = €9,600 = €8,000 + €1,600. No loss.
• Sell the 400 rights: receive 400 × €0.80 = €320; shares worth 400 × €19.20 = €7,680; total €8,000. No loss, but a smaller stake.
• Do nothing: if the rights expire unused, the holding is worth €7,680 and €320 is lost. Some banks sell unused rights automatically; check your broker's process.

Common mistake

Practice activity

Hypothetical example: Company M earns net income of €500 m and has 100 m shares. It spends €400 m of cash, which earned 3% interest, to buy back 5 m shares at €80. Ignore taxes. On paper: (1) EPS before; (2) net income and EPS after; (3) the percentage change in EPS. (4) Later, the company makes a 2-for-1 split when the price is €90. What happens to EPS and the price?

Key takeaways

• Read revenue, operating profit, free cash flow and one-offs first, then guidance.
• Splits change the number of shares, not the value of the company.
• Buybacks raise EPS mechanically; they create value only when shares are bought below intrinsic value.
• In a rights issue, use or sell your subscription rights; letting them expire costs money.

Next step

In the final lesson you will combine everything from this course into one stock analysis checklist and a research routine.