If there has been one undeniably bullish trend in the last 18 months it has been the strong earnings picture. I have given the sell side analysts a fairly hard time over the course of the last year, but the strength in earnings has shocked me and my estimates tend to be quite a bit tougher than the consensus. I expected the slowdown in mid-year growth to hit the top line harder than it has, but the international diversity of U.S. firms has helped maintain healthy revenue growth at a time when companies have been incredibly vigilant about cost cuts. U.S. companies have masterfully weaved through this recession in an effort to protect their profits and the results have been impressive. With 90% of the S&P reporting in the Q3 earnings season the numbers are very strong:
- 72% of companies have topped EPS estimates.
- 60% have topped revenue estimates
- Just 19% missed EPS estimates.
- Sales are up 9.8% year over year.
- EPS growth is 32% year over yar
Of course, the cost cuts have come at a cost as millions of Americans remain out of work. Thus far domestic revenues have not sustained a level that has resulted in a substantial pick-up in hiring. But corporations have made up for the less than stellar top line growth by boosting margins. Margins are currently approaching their 2007 peaks, but likely have some room for expansion. It will be interesting to see how QE2 and the impact of rising input costs influences this picture. At first blush, the impact does not appear to be widespread, however, we’ll have a better understanding of the Q4 earnings picture in the coming months when pre-announcements begin. For now, the margin story is intact. At risk, of course, is the labor force in the case that margins begin to turn. For now it looks like the combination of strong international sales and weak domestic sales will be enough to help labor markets slowly continue to heal. In a fluid and low visibility environment, however, this could change given the numerous exogenous risks.
(Figure 1, click to enlarge)
The revenue story has been better than expected, however, is far from v-shaped. Revenues per share remain well off their all-time highs despite a strong rebound in bottom line growth. Quarter over quarter revenues per share are growing at 2.6% while the year over year figure sits at 7%. The strength in revenues has been largely due to international strength:
S&P500 companies that generate more than half of revenue from overseas operations are expected to see higher 2010 revenue growth (10 percent in aggregate), compared to slower growth (6 percent in aggregate) for companies that derived more than half of revenue from domestic operations, a Thomson Reuters Datastream analysis reveals.
The biggest threat to top line growth going ahead is a slow-down in Asia. For now, that does not appear to be in the cards.
(Figure 2, click to enlarge)
My expectation ratio is telling a similar story. The index has trended very strongly since the market bottomed early in 2009 and aside from a brief dip in mid April the index has remained strong. Thus far it continues to tell a story of strong corporate earnings going forward. All in all it’s a story of impressive growth, with the “better than expected” trend intact, but with risks remaining as domestic revenues have failed to sustain US corporate growth.
(Figure 3, click to enlarge)