The earnings seasons are lining up just right for technology stocks.
Looking backward that’s one reason that the sector has led the rally off the March 9 stock market lows. And looking ahead it’s one reason why you should be adding technology stocks to your portfolio as we approach the fourth quarter.
Investors spend a lot of time fretting about whether or not a company’s quarterly earnings beat or fall short of Wall Stret projections. A quarter where earnings come in 5 or 7 cents a share above expectations can wind up being called a “good” quarter even if revenue plunged.
But there’s an even more important Wall Street definition of good earnings, especially for a growth stock.
It’s based on a year-to-year comparison of quarerly earnings. Did the company’s second quarter earnings this year come in higher than earnings in the second quarter last year? If so, hey, it’s a good quarter because the company is growing.
Of course, it’s easier to deliver that kind of year-over-year earnings growth in some quarters than in others.
If a company has been running flat out with revenue and profits growing by leaps and bounds, each quarter it gets harder to turn in a positive comparison. (Especially without cheating. Which is why cheating to make earnings look better becomes a veritable epidemic near the top of an economic cycle. We saw exactly such an outbreak of creative accounting in 1999 and 2000.)
So, for example, one of Cisco Systems (CSCO) earnings problems in fiscal 2009 has been that fiscal 2008 marked the top of a cycle and every quarter’s year-to-year comparisons look dreadful. Earnings had been rising steadily through the first quarter of fiscal 2009–which actually included August, September, and October of 2008 since Cisco is on a July to July fiscal year. That quarter the company made 37 cents a share, a penny more a share than in the first quarter of fiscal 2008.
But that growth was the last yar-to-year growth the company has turned in for a while now. In the second quarter of fiscal 2009 the company earned just 26 cents a share, a huge 8 cents a share less than in the year earlier quarter.
In the just completed fourth quarter of fiscal 2009, Cisco earned a paltry 19 cents a share. That’s a huge drop from the 34 cents a share the company earned in the fourth quarter of fiscal 2007.
Year-to-year quarterly earnings comparisons–when they are comparisons to the peak quarters of earnings cycles–exaggerate the shifts in a company’s fortunes. Looking at Cisco’s fourth quarter numbers from the fourth quarters of fiscal 2009 and 2008 it’s easy to conclude that the sky is falling–even though Cisco is actually coming through this storm in fine shape having gobbled up market share that once belonged to competitors.
These exaggerations aren’t limited to the downside. When a company starts comparing earnings for a quarter that saw a modest recovery with earnings from a trough quarter a year earlier, it’s all too easy to conclude that whatever problems the company had have been vanquished and the sky is the limit for growth.
And that’s exactly what’s about to happen for the technology sector as a whole in the fourth quarter of calendar 2009. It now looks like the fourth quarter of 2008 marked the bottom in earnings per share for the sector. Standard & Poor’s puts the earnings for the information technology sector of the S&P 500 at just $2.73 for that quarter.
Wall Street is predicting that fourth quarter 2009 earnings will come in at $4.89 a share.
That’s a huge swing in growth, equal to almost 80% growth in quarterly earnings year-to-year. Growth like that is itself enough to get Wall Street excitd.
But that 80% growth is going to seem even bigger because it will mark the first time that the sector has delivered positive quarterly year-over-year growth since the recession started. Every quarter starting with the fourth quarter of 2008 has shown a drop in quartely earnings compared year-to-year. That’s because earnings from the third quarter of 2007 to the third quarter of 2008 represented the high points of the earnings cycles. They presented incredibly tough comparisons.
Beginning with th fourth quarter of 2009, however, earnings in future quarters for at least the next year are going to be compared with the trough earnings of this recession.
Comparisons are about to get a lot easier and earnings growth at technology companies is going to look very impressive indeed.
Investors should think about buying a part of that story. I’ll have a pick in the sector in one of tomorow’s posts.
And Wa -the company managed to earn a penny more a share
No matter if this kind of It’s important to understand that Wall Street’s definition of “good” earnings is a comparative one. A good quarter is one where earnings for the quarter wer