Earnings Season: The Car Is Shiny, But Look Under the Hood 17 comments
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Investors who are wondering why stocks haven’t rallied this earnings season need look no further than the actual data. This earnings season is shaping up to be truly spectacular in terms of expectations, but a look under the hood shows that earnings are less than spectacular. While bottom line growth continues to be robust, the top line growth continues to come in weak (although better than expected). Not surprisingly, this is in-line with what we have been seeing in segments of the real economy (see “No Recovery On Main Street” for more info).
Earnings season is over half way over and the analysts have never been more wrong. Thus far, 74% of firms have exceeded expectations while just 19% have fallen shy of expectations. Of course, it’s not unusual for firms to outperform the analysts' expectations, but this ratio of 6:1 is practically unheard of. Zacks investment research notes that the average earnings season sees a ratio of 3:1 which means this earnings season is twice as good as those of the past. Not only that, but firms are also beating by a much wider margin than normal. On average, firms beat by 3%, but are beating by 7.5% this earnings season.
Of the firms reporting, 72% have outperformed in terms of operating income, while only 43% of them have reported earnings that were higher than the same quarter last year. On the top line, 64% of firms have outperformed this quarter’s revenue estimates while just 27% of firms are reporting higher revenues than the same quarter a year ago. Margins are coming in at 7.8% vs the 15 year average of 6.6%. This shows that margin expansion and cost cutting is leading to much of the bottom line growth.
The discrepancy between expectations and reality is nowhere more apparent than it has been in our expectation ratio. The ratio clearly shows the schism between actual earnings and analysts' expectations. The ratio was essentially flat this week versus last week’s reading, but continues to display a very wide margin between analysts' estimates and the underlying income statement components of the ratio. We would expect the ratio to narrow in the coming quarters as analysts ratchet up their estimates and narrow the divide. (See here for more on the ER).
Overall, earnings are expected to decline 5% for the S&P 500 on a year over year basis. Total sales are expected to decline 11% year over year and slightly higher compared to Q2. Some might call this an L-shaped recovery in revenues, but the slight uptick actually represents more of a backwards check mark. While cost cutting and margin expansion have helped contribute to the U-shaped EPS recovery, the true underlying weakness of the economy is apparent on the revenue line.
(Revenues Figures Are In $Millions)
The headline numbers for this earnings season will be paraded as a huge success by the mainstream media, but a look under the hood shows no year over year improvement in the top line growth and no sustained bottom line growth can occur without a follow-through in top line growth. For now, the jury is still out on the recovery in corporate earnings, but the backwards check mark shaped recovery in revenues is quite apparent.
Source: Zacks, S&P
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This article has 17 comments:
"This shows that margin expansion and cost cutting is leading to much of the bottom line growth."
This is the answer to the detachment from reality that that market has. This is why things are 'well' on Wall Street but not on Main Street.
When 'ABC Company' cut its costs, sells assets and lays off it workforce, its bottom line looks great! "It's a great investment" we say, "look at the balance sheet!”
But look close. Has ABC Company sold more widgets? How about their future of selling more widgets with fewer employees and less real assets?
Companies that have cut their production ability to make their balance sheet look good to investors today have actually cut their future profitability. Companies like this are shrinking but the stock market only looks at the bottom line and says "This is a great company that can profit in an economy like this". And up goes their stock. Just wait. When they have cut all they can and it is time to produce to be profitable what will their balance sheets look like then?
Markets clearly were pricing in 'beats expectations'. Priced for perfection, I say. I hate to imagine where markets would head if a little bad news came across the wires.
Reality is unemployment. 30+ million on food stamps. Even the government employment has peaked. www.planbeconomics.com.../
Its called a pump and dump.
They turned this whole thing into a media event just like they did in Q2 in another pathetic attempt to do what no one has been able to do yet - convince the crushed, broken, dying American middle class that all is well, so pull out what's left of your credit cards folks and let's hit the malls... we're counting on you to get this lie we call an "economy" back on its feet.
Fool me once, shame on you... fool me twice, shame on me.
Reality is that businesses are scared. They would not have done so much cost cutting [mostly people] if they did see things getting worse - much worse. All discretionary purchases can be postponed if not dropped completely. And there is constant downsizing on necessities - lesser brands, quality and of course price.
We are entering a period of deflation that will be evident in the press over the winter. What will a person sell in order to pay for heat? And they will be forced to take what is offered. Used car prices enjoyed a bump, but just look at the markdowns in the weekly mags - unprecedented as the small guys clamor to sell something.
Manufacturers of consumer goods will fight for whatever business they can get - they will cut prices until they kill each other.
Just after the holidays, retail stores will close in mass and the commercial real estate crisis will be in full force.
A wealth building society are a capitalist society. You going from your rags to your riches are you knowing what would work for you and if not know how ever your business work for you, work out the business for yourself and you will have an bottom line economic.
Overall this looks like a typical, but very deep recession that was caused by the banking industries innovative approach to the automotive and housing markets by artificially lowering prices through financing. Now we have always inflated the housing market with the interest deduction, the leasing of cars was a fool's game as was the shift from LTV of 80-20 to 100-0.
how much of a drag that will be going forward remains to be seen but I like the chances of us getting back to top line growth around Q3-2010.
On Nov 04 11:03 AM jdl51 wrote:
> Well, I've always been told that the markets are forward looking.
> We've gone up over 50% in six months. The markets anticipated improved
> earnings, they're here and now we're waiting for what's next. If
> the economy continues to improve, job cuts are trending down and
> are expected to show growth shortly after the first of the year,
> then we'll start the next leg up.
That spin's as old as the hills.
Earnings have tanked YoY, revenues have tanked YoY, they are just less bad than expectations because the spinmeisters intentionally lowballed said estimates in order to engineer "beats."
Top- and bottom line numbers are down big basis 2008 numbers, which are down big basis 2007 numbers.
The number of highly respected companies that have experienced double-digit percentage revenue declines for 3Q 2009 (a time of purported economic expansion) is disturbing.
On Nov 04 09:02 AM ain't no fortunate son wrote:
> If you lowball your estimates enough, even a dead man can beat expectations.
> Do you think it was some kind of coincidence that CNBC anchors have
> started screaming about all the "they beat expectations!!!!!!" at
> 7:30 every morning for the past 3 weeks?
>
> Its called a pump and dump.
>
> They turned this whole thing into a media event just like they did
> in Q2 in another pathetic attempt to do what no one has been able
> to do yet - convince the crushed, broken, dying American middle class
> that all is well, so pull out what's left of your credit cards folks
> and let's hit the malls... we're counting on you to get this lie
> we call an "economy" back on its feet.
>
> Fool me once, shame on you... fool me twice, shame on me.
On Nov 04 11:55 AM bobbobwhite wrote:
> Yeah, it is so deceptive to use "50% up" like it means something
> way more than it is. Remember, that 50% pop was on a greatly reduced
> figure(and no certainty that it will last). A $100 stock falling
> to $10 is a 90% drop, but a $5 pop up on that same $10 stock is up
> 50%. Wow! ......Not. Don't be like fund managers and try to make
> that 50% pop "seem" to be worth more than half of the initial 90%
> drop. Never was, never will be. Huge difference.
On Nov 13 02:00 PM 19709 wrote:
> I believe what bobbobwhite was trying to point out is that the recovery
> will come in a series of legs up.