Third quarter S&P 500 earnings results for the first two weeks of the season are running far ahead of Street estimates. Importantly, sales are also faring much better than expected. Here's a short breakdown of the results thus far for the S&P 500 companies: Earnings Reported through Friday Positive Surprises: 146 Negative Surprises: 25 % Positive Surprises: 85% Year over Year earnings growth for reporting companies: -14% This is just short of remarkable. Last quarter the beat ratio was 75%, the highest in many years. The beat ratio of 85% so far this quarter is far higher than we expected, and we were as optimistic as anyone that earnings would again be better than Street estimates. In addition, the growth for all reporting companies stands at a minus 14%. Just prior to the beginning of the reporting period, the consensus estimate was for a negative 20% year over year earnings growth rate. Revenues for Reporting Companies Positive Surprises: 112 Negative Surprises: 60 % Positive Surprises: 65% Year over Year revenue growth: -2.8% The picture for revenue surprises is far less striking than earnings surprises. However, overall, revenues are much better than expected. The most important data, perhaps of the whole list is that average year over year revenues are down only 2.8%. Prior to the reporting period, revenues were expected to be down more than twice that amount. Two weeks do not a season make, but thus far, with many important companies reporting, S&P 500 companies are knocking the socks off of Street earnings estimates. The common thread among the good earnings reports is cost control. American companies are just doing an amazing job of right-sizing costs. If this beat-ratio continues, I believe that stocks will continue to move higher in the weeks and months ahead. I'll update next week. Data courtesy of Bloomberg.
Friday, October 23, 2009
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7 comments:
Greg,
Nice call on earnings, you nailed it.
In your previous post re John Burr Williams, you write this about him " Williams’ also voiced great skepticism toward the theories of John Maynard Keynes and President Franklin Roosevelt's "New Deal," both of which promoted the idea that government spending could lead to prosperity." Well said, if we are followers of JBW why does DCM seem to praise, or at least agree with, government stimulus spending. I am seriously worried this administration is putting us on the road to becoming a third world country.
Steve Rose
Earnings don't really matter any more. Well, unless you are Amazon, at which point beating the whisper number can tack on $17 billion to your market cap in one day.
One wonders if the true reason for the Amazon moonshot was that the Federal Reserve is now accepting Kindles as collateral at the discount window.
S.
We don't like the stimulus plan at all. 70% of it is welfare type transfer payments and only 30% are likely to stimulate the economy. Having said that, when an economy freezes up, we believe the government has a role to stem the tide and initiate programs that will incent employers to create jobs. That certainly has not happened yet and that is the reason that unemployment is still near 10%. With all the new taxes coming, we can't see how any small business person in his right mind is going to do much hiring until it is clear that the economy has turned for sure.
I am fairly certain that the rules of economic supply and demand have not been repealed. If that is the case, the US is in for a long period of very slow growth. That is the reason that we are moving a greater percentage of our holdings to international stocks. Still great companies with good dividend records, but headquartered outside this country. Call me sometime. I might make more sense.
The problem with the earnings game is that it is more about the analysts being close than the companies success or failure. We get upset when analysts are way off base to the downside and punish the stock, and we are elated when the are off base to the upside by rewarding the stock... And yet it is the analyst that is the constant problem. And the problem is the same regardless: anchoring, straightline assumptions, poor homework... it really is silly.
The revenues are surprisingly less bad--until one factors in currency adjustment. The dollar weakness has almost to a one dramatically helped the large corporations with international exposure. Those without that have had good revenue stories are generally one of survival bias--like Best Buy...
What you may be observing though in this earnings season that is different from last is that earnings is not near as important as the conference call and outlook. Great earnings were actually expected this quarter unlike the last two. You can see it in the last minute consensus changes leading into the earnings season. The prior two quarters, the consensus actually lowered the earnings expectations, and this quarter the consensus was actually raised going into it in general indicating a higher degree of confidence.
Earnings will ALWAYS matter. And the game will always be there. It is a frustrating part of the business, but it is the reality. Don't hate the players, hate the game...
Greg, I agree with "not liking" the stimulus but recognizing the need. The govt has a role similar to a parent, and sometimes parents have to step in and help. However, as the kerfuffle of the crisis subsides, I think the policy of "too big to fail" needs to be looked at; and I concur with Volker and Greenspan in that there should not be any one bank that is TBTF. This horse is not out of the barn and "too late" to undo as some say. Our govt can do anything. It's broken up T, it can break up a bank or two. It can reinstitute Glass-Steagel, It can better fund the SEC to do it's job (which is all we really need--do it's job!). However, if we don't address these things, we do run the risk of turning all the large banks into quasi GSE's-- and that is not capitalism.
There are several points I would like to question:
1. The stimulus package: should it be withdrawn? It seems as stated by Mr. Donaldson, mainly a welfare package and does nothing for our crumbling infrastructure nor does it create long term jobs, support basic research or anything else that would benefit the US long term. Remember give a man a fish and he eats for a day, teach a man to fish and he eats for life. We need to re-learn to fish. The private sector has been good at that for many years.
2. If the government is our parent shouldn't we report it to the Child Welfare Protection Agency. It seems a dysfunctional parent. It seems to lack a focus on the economy, entitlements, etc. It is more interested in executive pay, fighting with the Fox Network and blaming everything on someone else. The growth of the national debt and the devaluation of the dollar will in fact make us a third world country. In that scenario the best jobs it seems would actually be in the military.
3. It is speculated and borne out by many television clips preserved for posterity that Barney Frank and Chris Dodd apparently did block the regulation of the banking industry. The Clinton plan of housing for all and the lack of regulation, the lack of fiduciary responsibilty and finally greed led to the biggest financial debacle since the depression and these people are still driving the boat. I for one am afraid of anything they suggest.
4. Maybe they could all go home and quit messing with the knobs and dials, Maybe the President could go back to Chicago. The bureaucracy would probably just go on interpreting the laws on the books and things might actually have time to revert to the mean.
5. Living at the extremes, both the far left and the far right, can't be good for developing a united front for facing a very uncertain world future.
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