Economic Split In Corporate Earnings
Kurt Brouwer April 19th, 2008
As we all know, financial companies took an earnings hit this quarter as did consumer-oriented companies.
But, plenty of companies in other sectors took home the gold. Companies — from Coke to IBM to Google — made plenty of money this quarter and their prospects look good going forward [emphasis added below]:
Economic Split Seen In Corporate Earnings (Wall Street Journal, April 18, 2008, Tom Lauricella)
As first-quarter corporate earnings reports begin to roll in, a stark picture is emerging of an economy on two tracks.
Banks and companies that sell directly to consumers are grappling with the impact of falling home prices and tightening credit. But many big businesses, especially those that sell to other U.S. companies or to customers abroad, are proving resilient.
On Wednesday, Coca-Cola Co. Chief Executive E. Neville Isdell noted during the company’s conference call that he had taken a recent trip to Chile and Peru. “There’s a vibrancy in Latin America that I don’t think we’ve seen in decades,” he remarked. At International Business Machines Corp., which derives 65% of its business from outside the U.S., Chief Financial Officer Mark Loughridge said the firm posted “very, very solid growth” in emerging markets.
…And late Thursday, Google Inc., which makes 51% of its revenues outside the U.S., reported much stronger than expected results. The company dashed recent concerns that its remarkable growth — based largely on advertising — would be slowed down by the consumer downturn. “We’ve looked at this really carefully and we do not see an impact as of this time,” Google’s CEO, Eric Schmidt, said in a conference call. The market responded by pushing Google’s stock price up 17% in after-hours trading.
…Thus far, roughly 20% of the companies in the S&P 500 have reported, and overall first-quarter earnings are down 22.1%, according to Brown Brothers Harriman. But excluding financials, earnings are up by 8.2%.
…”The market was beginning to be priced for a much worse earnings picture…and that doesn’t seem to be the case right now,” says Brian Rauscher, strategist at Brown Brothers.
…Despite the first-half losses, some analysts predict a big rebound in third- and fourth-quarter earnings. The wave, they believe, will be led by financials and companies that make and sell so-called consumer cyclicals — such as cars or home furnishings…
My Spidey Sense goes off when I read comments such as the last one in bold — “…some analysts predict a big rebound in third- and fourth-quarter earnings…” Call me cynical, but Wall Street does earnings predictions with about half the accuracy of our local weatherman. Despite my skepticism, I do think a rebound in the fourth quarter makes sense because the wave of writeoffs hit in the fourth quarter of 2007, so the year-over-year comparisons the fourth quarter of 2008 should be favorable. However, the lofty predictions of a big earnings rebound in the third quarter seem far more dicey. I’m all for it, but I’m not holding my breath either.
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Kurt, I think you hit the nail on the head regarding the Wall Street analysts and their ability to forecast anything. The track record is not pretty and they are most often overoptimistic. I’m guessing that will be true again in the second half of the year.
Another thing worth noting is that the cheap dollar is juicing the earnings for the big multinationals. Results don’t look as rosy in constant dollar terms when those foreign earnings are translated back to dollars. Unless the dollar continues to plummet at a rapid pace, that benefit will eventually disappear.
All this talk of strong foreign economies supporting our domestic market sounds eerily familiar to me. Eggheads with little real world experience or common sense (i.e. economists) are quick to point to statistics about the shrinking percentage that U.S. GDP represents of the world economy and therefore downplay its negative impact. They drew the exact same incorrect parallels about the housing market and the U.S. economy and before that about subprime lending and housing. Anyone else see a pattern here?