Earnings on a roll -- for now
Posted
Jul 17 2009, 06:12 PM
by
Anthony Mirhaydari
Rating:
What a week. Despite some apprehension among investors heading into the second-quarter earnings season, companies have reported some impressive numbers. This helped push the major indexes up some 7% since Monday.
So far, 55 of the S&P 500 companies have reported Q2 earnings. Among these, 71% have reported earnings above analyst expectations, 9% reported in-line results, and 20% fell short. Since 1994 a typical quarter sees 61% of companies beat estimates, 19% match, and 20% miss. Recession or no, corporations are clearing the hurdles of low expectations. The aggregate earnings "surprise" is 11.2% above estimates -- far above -11.3% surprise factor seen over the last eight quarters.
The overall impression is that executives are managing through this difficult economic period as they should: By hunkering down, cutting expenses, and waiting for a sales recovery. This is great in the short-term, as it limits the trickle-down effect of revenue compression on the bottom line. But it's not sustainable and it won't be enough to meet higher expectations in the third quarter.
Companies can only cut so deep for so long before they hamper their ability to grow in the future. Collectively, they can damage the economy by pushing up unemployment and hampering demand for their products. Individually, they lose productive employees and as a result, will be spending the early part of the economic rebound frantically trying to hire and train replacements.
As you can see in the chart above, the number of mass layoff events that involve more than 50 job losses remains at very high levels. The latest data from May had 2933 events, which matches March's high. June's numbers come out next week, but my guess is that the will be of a similar magnitude. Unless we're about the enter the realm of 12% unemployment, mass layoffs will need to start falling. And that means companies that have relied on pink slips to boost earnings will need to figure something else out if they can't increase sales.
Here are a few specific examples. Aluminum giant Alcoa (AA), which kicked things off last week, has announced nearly 22,000 job cuts over the last 12 months -- about one-third of its total workforce. PPG Industries (PPG), maker of industrial paints and coatings, handled a 30.4% drop in revenue by focusing on "aggressive cost-management and restructuring actions." You know this means headcount reduction. And the 26.6% drop in revenue at Harley-Davidson (HOG) is forcing unpaid factory closures for six weeks later this year. The company also announced 1,000 new job cuts.
Currently, the S&P 500 earnings growth rate for the second quarter stands at -35.2%. For the third quarter, analysts are forecasting a -20.8% earnings growth rate on the back of a 152% boost to financial sector profits. It seems expectations are about to get a lot tougher just as it becomes harder to boost profitability. This could mean more trouble come October.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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