I wouldn’t make too much of today’s move to the upside in U.S. markets. It’s not unusual for the Friday of a down week to show a slight bounce.
And I certainly wouldn’t want to pin any move to the upside on better than expected earnings reports after the close in New York yesterday from Google (GOOG) and Microsoft (MSFT.) I think Google’s results continue a worrying trend of falling ad prices thanks to the growth of mobile traffic (with mobile’s lower ad prices) and Microsoft’s results are only better than expected because Wall Street had been aggressively cutting projections in the weeks before the company’s report.
Certainly today’s earnings results from market bellwethers McDonald’s (MCD) and General Electric (GE) won’t relieve market worries about revenue and earnings growth for U.S. companies. Read more
Back in January, the forecast was for first quarter 2013 earnings at Standard & Poor’s 500 stocks to climb 4.3% from the first quarter of 2012. That’s an easy bar to jump, right?
Then what do you call the current Wall Street projections that call for year over year first quarter earnings growth of just 1.5%.
Super-easy? Impossible to miss? Irrelevant? A big worry with U.S. stocks at all time highs?
I know we’re just at the beginning of earnings season, but of the 5% of S&P 500 companies to report as of yesterday, almost 75% have topped expectations, according to Thompson Reuters.
Are we starting to see a pattern to earnings season? And does it point to problems not this quarter (as expected) but next?
Just about one-third (160) of the companies in the Standard & Poor’s 500 stock index have reported through today, January 28. To date S&P 500 earnings are up 6%. That’s quite a bit better than the 2.5% earnings growth that analysts were expecting just before the start of the earnings season. About 61% of companies in the S&P 500 that have reported have come in above Wall Street earnings estimates.
The revenue picture is just as strong—and that strength is more surprising. Sales for the S&P 500 companies that have reported are up 4%. At the start of the quarter Wall Street analysts had grown very pessimistic. They were projecting revenue growth of just 2% for the quarter.
But there is one trend this earnings season that isn’t quite so positive. Many companies that are reporting beats for the fourth quarter on earnings and revenue are then lowering guidance for the first quarter of 2013.
Caterpillar (CAT), which reported this morning before the markets opened in New York, is a good example of the trend. The company reported earnings of $1.91 a share (excluding a one time charge against goodwill). That was 19 cents a share above the Wall Street consensus. Revenue came in at $16.07 billion, just a bit shy of the $16.2 billion projection.
Of course, both “beats” were due to very low expectations for the quarter. Revenue, for example, fell 6.8% from the fourth quarter of 2011. The $1.91 a share that Caterpillar earned in the fourth quarter of 2012 was down from the $2.32 it reported in the fourth quarter of 2011.
But it was the company’s guidance that hurt—and that forms part of a worrying trend for the first quarter of 2013. Caterpillar told investors to expect revenue of just $14 billion in the first quarter (against a Wall Street consensus of $15.09 billion.) The company didn’t give specific guidance for earnings in the first quarter of 2013 but told Wall Street to expect something lower than the $2.37 the company reported in the first quarter of 2012. In giving that guidance for the first quarter of 2013, Caterpillar noted that dealers didn’t finish working down excess inventory in the fourth quarter and had more to do before they began ordering again. Sales in China and the United States would pick up slightly but Europe remained a huge question mark.
To my ears Caterpillar’s remarks sound similar to what other companies have said about the first quarter. Listen carefully during the rest of earnings season to see if you hear a trend.
Alcoa (AA), traditionally the company that starts off quarterly earnings seasons, reported earnings of 6 cents a share after the close of New York markets last night. That was right on analyst estimates. The stock is up 0.16% today, as of 1:15 p.m. New York time on slightly better than expected sales of $5.9 billion.
I think the fact that the market has decided that sales of $5.9 billion are good news tells you a lot about expectations for fourth quarter earnings right now. Revenue of $5.9 billion is good news in comparison to analyst forecasts of sales of just $5.61 billion for the quarter. But at $5.9 billion sales were still down 1.5% from the fourth quarter of 2011. (The company’s other good news was also rather limited. Alcoa estimates global aluminum demand to grow by 7% in 2013, up from 6% growth in global demand in 2012. This isn’t a barnburner demand number.) For 2013 Alcoa expects global growth in aluminum demand of 9% to 10% in aerospace; 1% to 4% in automotive; 2% to 3% in packaging; and 4% to 5% in building and construction.
The nature of Alcoa’s good news—a very modest beat above expectations for low or no growth—is a good indicator of where stock market expectations as a whole stand for the quarter. Analysts are projecting that earnings at companies in the Standard & Poor’s 500 Stock Index will grow by just 2.9% in the about-to-be-reported fourth quarter. That would be, according to Bloomberg, the second-slowest quarterly growth in S&P 500 earnings since 2009.
Just the old conservative Apple (APPL) lowball on guidance or a sign of trouble? The market will tell us how it how it sees Apple’s September quarter numbers reported just moments ago and its guidance for the December quarter first when after hours trading opens at 4:50 New York time today and then more definitively tomorrow.
Guidance, I’d guess, is going to be the big issue. Apple told investors to expect $11.75 a share for the December quarter versus the current Wall Street estimate of $15.53. Revenue, for the quarter, will be $52 billion, the company said, instead of the $54.95 billion of the Wall Street consensus.
But there will be questions about the current quarter as well. The company reported September quarter earnings of $8.67 a share, missing the Wall Street projection of $8.75. Revenue climbed 27.2% year over year to $35.97 billion, a tad above the Wall Street consensus of $35.78 billion in revenue.
Apple sold 256.9 million iPhones in the quarter—that was better than the Wall Street estimate of 25 million. But sales of 14 million iPads were below analyst estimates of 17 million and the sale of 4.9 million Macs in the quarter lagged Wall Street’s consensus of 5 million.
Gross margins of 40% in the quarter trailed the Wall Street consensus of 40.6% but were significantly above the company’s own guidance for 38.5%.