VOL. 128 | NO. 142 | Tuesday, July 23, 2013
The Worldly Investor
Another week is in the books, resulting in another record close for both the Dow Jones Industrial Average and the S&P 500. Buoyed by some more accommodative comments from Federal Reserve Chairman Ben Bernanke during Congressional testimony this week, investors took the occasion to prop the U.S. equity markets to new highs. Coinciding with Bernanke’s testimony, a deluge of second quarter corporate earnings announcements was released. As a reminder, in this space last week, we wrote,
“While the asset price insurance policy benefited stock market multiples, the economic insurance policy will benefit corporate earnings. Therefore, the Fed has committed itself to the pursuit of higher corporate earnings! Investors looking at the current quarter will see little evidence of this … What has markets rallying is not the reality of the past, but the expectation of the future.”
A snapshot of some of the individual company earnings releases reveals the hit-or-miss nature of this earnings season:
Google: Reported second-quarter adjusted earnings of $9.56/share, compared to expectations of $10.80/share. Quarterly revenue (excluding sales passed on to partner sites) of $11.1 billion was lower than the $11.3 billion top-line number expected by analysts.
Microsoft: Earnings were reduced by $0.07/share by way of a $900 million writedown of the Surface tablet inventory. Outside of that writedown, earnings registered at $0.66/share, compared to analyst expectations of $0.75/share. Reported quarterly revenue ($19.9 billion) also came in lower than expectations ($20.7 billion). Microsoft’s stock responded by falling over 10 percent today (to be fair, the stock had been the third best performing stock in the Dow year-to-date).
IBM: Not all was disappointing in the technology world, as IBM reported profit of $3.91/share (excluding a $1 billion restructuring expense), beating analyst expectations of $3.78/share. However, revenue fell by 3.3 percent (compared to second quarter 2012) to $24.9 billion, which was lower than analyst expectations of $25.3 billion. IBM did raise their full year 2013 profit forecasts, forecasting profits of $16.90/share, compared to expected profits of $16.70/share coming into the year.
Citigroup: Reported a 42 percent increase in profit, as earnings (excluding an accounting adjustment) were $1.25/share, above analyst expectations of $1.18/share. Overall revenue grew by 8 percent, as stock-trading revenue specifically surged by 24 percent.
General Electric: second quarter profit did exceed analyst estimates, but quarterly revenue of $35.1 billion was less than the $35.6 billion that analysts were expecting.
Coca-Cola: The soft drink powerhouse met earnings expectations, but missed on the revenue targets. While global sales volume was up by 1 percent, it was less than the 3.3 percent analyst target. Furthermore, sales volume in Europe specifically was down by 4 percent.
Stepping back from individual companies to the broad market, over 100 of the S&P 500 companies have now reported earnings. Of those, 72 percent have beaten analyst estimates (remember that those estimates have been coming down), while 53 percent have won on the revenue side. The leaders have been financials, as 80 percent of the financial companies that have reported so far have exceeded estimates. Excluding financials, though, overall earnings are expected to decline for the second quarter. Technology companies are expected to be the most disappointing sector, as analysts expect a nearly 7 percent profit decline.
So, with 20 percent of the companies reporting, investors have seen some evidence of higher corporate earnings, while revenues have been underwhelming. As more wheat separates from the chaff during this economic cycle progression, there will be a divergence in successful and unsuccessful companies. This kind of hit-or-miss environment can give active managers the chance to shine, as passive investing has been in favor during this “rising tide lifts all boats” recent market trajectory. The jury is still out on forward guidance. As we noted last week, what is expected to come is more important than what has already happened, in terms of investor psyche. As the remaining 80 percent of the companies report, expect more clarity on the guidance.
Sources: Bloomberg, Yahoo Finance
Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.