It is the beginning of earnings season and this week there are literally hundreds of companies reporting. Many investors and analysts are going into this quarter with a skeptical eye as it is difficult to foresee just how bad things are. Most are concerned with the negative outlook and how that actually stacks up against analysts’ predictions.
Investors are finding themselves in a conundrum. After 6 weeks of enormous gains in the equity markets, there are those that will want to take some of their profits and there are those who are feeling like they missed the opportunity of a lifetime to buy in at the bottom. Truth be told, there is nothing good that can come out of this earnings season as we are still in the heart of a historic downturn. Consumers and businesses have decided to horde their cash until the all clear is given.[readmore]
If you were to look at the first week of earnings, you may have been pleasantly surprised as you saw the effect of government intervention on financial companies, such as Citigroup (C), Bank of America (BAC), Goldman Sach (GS) and other banks as they miraculously beat estimates.
In fact here are some numbers to look at considering the changes in mark to market accounting and the amount of TARP monies paid showing up as earnings:
Company Estimated EPS Actual EPS
Goldman Sachs $1.64 $3.39
Citigroup – $0.34 -$0.18
JP Morgan $0.32 $0.40
Bank of America $0.04 $0.10
The list goes on and on with winning quarters for both earnings and sales growth. Is it a sign of things to come?
Before we answer that question, let’s have a look at the remaining list of companies in the S&P 500 (ex financials) Index that have reported so far. There have been a total of 32 stocks which have reported. Below are the results.
The important item to look at is the growth column. While we are seeing a good deal of earnings surprises to the upside, the sales (revenue) is showing a significant amount of strain. Companies will continue to cut costs ( employess, cap-x) which is not a good indication of how the economy will fair. This is because companies are now beating severely reduced estimates as they are able to cut cost and become more and more efficient as the recession drags on.
(Larry Summers now believes that it will be a long time for economic recovery – Watch video HERE)
Once a company reaches an inflection point where cost cutting is no longer a viable option, we could see earnings slow and become more inline with sales growth. If you are considering investing on the dips in this market, it may be a good idea to keep this table in mind as there is only so much that fundamentals can be ignored.