Last October, the third quarter 2009 earnings reports were important. They revealed that the economy was improving. And they showed that leading companies had reestablished their operations and finances enough to generate earnings growth at the economy’s lower levels. They also provided evidence that financial companies were righting themselves. This was just the proof we needed that things were on track.
So, what do we want to see from the fourth quarter 2009 earnings reports?
Actually, they carry less weight than third quarter’s. From other measures, we know growth and improvement has continued. So, we expect to see it reflected in fourth quarter earnings. Basically, fourth quarter 2009 is the stepping stone to 2010.
Following Labor Day, Wall Street typically gets busy looking at the next year’s growth forecasts. That activity started last September, although there remained a spotlight on third quarter earnings. Having come off a traumatic bear market, third quarter results needed to show that the expectations driving the stock market up since March were borne out.
Today, fully into 2010, the fourth quarter 2009 earnings numbers play a smaller role. Yes, there will be the inevitable surprises, some negative, but the underlying trend should be continuing growth with profits. What will be important are management’s evaluation, outlook and plans for 2010. Those remarks and beliefs will support analysts' forecasts – perhaps more so than connecting the dots between third and fourth quarter 2009 earnings.
So, where do we stand at the beginning of the earnings report season? Here are the relevant numbers for the Dow Jones Industrial Average’s thirty stocks (as of the beginning of the week). The forward price/earnings ratio and forward earnings yield (remember that each is the reciprocal of the other) use current 2010 earnings forecasts.
Note that these leading companies have an average forward price/earnings (P/E) ratio of less than 14 times and a forward earnings yield of more than 7%. These are attractive valuations, especially since full recovery isn’t expected until 2011, at the earliest. (When earnings are running below normal, P/E ratios tend to be higher as investors look through the weak period.) Plus the dividend yield of more than 2-1/2% is a decent income flow, particularly when potential dividend increases and price gains are factored in.
So, look for the 2009 fourth quarter reports to come and go. In their wake, analysts' 2010 earnings forecasts will become the talk of the town as investors focus on 2010 exclusively.
Disclosure: No positions