And So It Begins: A Look Into Earnings Season

Lots of chatter out there about earnings season, which got off to its traditional start yesterday...with Alcoa's traditional miss.

Curiously, the conventional wisdom is that the conventional wisdom is too optimistic, which is to say that traders and investors appear to believe that earnings estimates for the next two or three quarters remain too high--even after the analysts have brought them down. But there are a couple funky elements in the mix here that merit some attention.

First, there's the question of whether current earnings expectations are justified. If there's anything approaching conventional wisdom out there, it's that the second half of 2008 will be show dramatic improvement over the first half. From Bloomberg's Michael Tsang and Eric Martin (emphasis added in bold):

The S&P 500 is valued at 13.9 times estimated earnings, the least compared with reported profits since 1990, according to Bloomberg and S&P data. The ratio is based on analysts' forecasts that show companies in the S&P 500 will earn a total of $99.67 a share in 2008, brokerage data compiled by Bloomberg show. That's more than the $87.72 a share S&P 500 companies earned in 2006 and would be the highest profit on record, data from S&P showed.

Getting there hinges on companies rebounding from projected earnings declines of 11.3 percent and 3.5 percent in 2008's first and second quarters, Bloomberg data show. Income from continuing operations will rise 13.9 percent in the third quarter and jump 54.5 percent in the fourth, according to the forecasts. The per-share earnings are based on profit estimates for the S&P 500, adjusted for each company's weighting.

The Street's analysts aren't the only ones projecting a major turnaround in 2008's second half; Alan Greenspan sees the same handwriting on the wall, as do the unstoppable cheerleaders at the National Association of Realtors.

But there's a second element in the mix: How the Street will value corporate earnings, whatever they turn out to be. What about that claim we highlighted above, that equity valuations are the lowest since 1990? Well, that depends on how you do the math. As Carl Swenlin notes at DecisionPoint.com, commentators tend to cite "pro forma" or "operating" earnings. GAAP earnings, though not immune to cynical tweaking, are a much better indicator of corporate realities. And based on GAAP figures, the S&P 500 isn't anything resembling cheap.

Check out this very telling chart from Swenlin, in which the black line indicates the S&P 500's acutal historical prices and the green, blue, and red lines represent multiples of 10, 15, and 20 times GAAP earnings, respectively (click to enlarge):

Bottom line: The process of multiple compression that began in 2000 has made only marginal progress since then. It surely isn't over yet, and if earnings do fall short of the Street's still-lofty expectations for the second half of this year, it'll make for some very interesting times in in the equity markets.

As we noted a week ago, even if the acute stresses of the credit crisis begin to recede (and that's not a given; just ask John Mack), we could still face the more chronic problem of earnings disappointments.

Sources

Dale Crofts and Mark Herlihy, "Alcoa Falls as Profit Halves on Energy Costs, Dollar," Bloomberg, April 8, 2008

Michael Tsang and Eric Martin, "Schwab Asks Who Needs Analysts After Biggest Flub," Bloomberg, April 7, 2008

Scott Lanman and Lily Nonomiya, "Greenspan Says U.S. Home Prices May Stabilize in 2008," Bloomberg, April 8, 2008

Christine Harper, "Morgan Stanley's Mack Expects Credit Crisis to Last," Bloomberg, April 8, 2008

Comments

[Marol:]

So how can I get/where can I find a list of times when various stocks report earnings (including whether it's before- or after-market)?

2008 Apr 08 10:18 PM

[TBGVI:]

I'm sure there are a bunch of places, but Yahoo has them listed by date here:
biz.yahoo.com/research...

2008 Apr 09 12:41 AM

[User 6790:]

This is a good site to find earnings relase dates by company/ by day along with before-after market.
www.earningswhispers.c.../

2008 Apr 09 03:21 PM

[User 6790:]

This is a good site for earnings dates by company/by date
www.earningswhispers.c.../

2008 Apr 09 03:22 PM

[Gary Kramer:]

I've been working on a post to show how 2008 earnings estimates are still way higher than what we'll end up with, but you've already done everything I was going to do. Excellent post!

2008 Apr 09 08:54 PM