Corporate earnings are also referred to as “company earnings” and “corporate profits:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.
Earlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)
Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.
We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.
At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.
But there are two blatant threats to companies in the key stock indices and the profits they generate.
First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More
The earnings are beginning to flow and it’s a total mixed bag out there again.
Carnival Corporation (CCL) beat the Street with its second-quarter numbers, with cruise line sales growing four percent over the second quarter of 2013.
Guidance, however, was mediocre and the position sold off on its earnings results.
Walgreen Co. (WAG) has been very strong on the stock market over the last 12 months. The drugstore chain produced a six-percent gain in sales to $19.4 billion, and a 16% gain in earnings to $722 million.
But the company is getting squeezed both by health insurers and pharmaceutical manufacturers, so its business model is getting pressured.
Walgreen is considering reincorporating overseas to reduce its tax burden, but it won’t have details on any potential plan until later in the summer. The stock went up on the news.
Second-quarter earnings results were actually a bit better than expected and once we get into blue chip numbers, I think the market will be a bit more appeased.
It is important to remember where stocks are coming from. It’s been an exceptionally good last few years for equities; 2013 was outstanding.
The first quarter was a tough one, both due to the weather and general business cycle conditions. The market isn’t expecting second-quarter numbers to be strong, and that goes for both gross domestic product (GDP) and corporate earnings.
All that corporations have to do is meet or beat on one financial metric and either affirm or improve existing full-year guidance. With this backdrop, institutional investors will keep buying.
Monsanto Company (MON) soared to a record 52-week high after releasing a … Read More
Oracle Corp. (ORCL) reports on Thursday and it’s one of the first large corporations to do so this reporting season. Second-quarter earnings season is just about here, and it’s exactly what the stock market needs now.
The lull between earning seasons can make for some wacky trading action. Often trading volume diminishes and from a business perspective, what you want from a company you’re thinking about investing in (or divesting) is its most recent numbers.
I thought that first-quarter earnings season was pretty decent, and I think companies will surprise the marketplace again for the second quarter.
A couple of trends that emerged in the first quarter was that European operations of large multinationals showed improvement comparatively, and that’s important for these super big companies that do business in developed markets.
The other trend was that currency instability held back corporate earnings. In many cases I read reports where the bottom-line would’ve been one to three percent higher if it weren’t for major devaluations in developing economies with large populations. Of course, this is an ongoing investment risk that any multinational is going to face and as an investor, there really isn’t anything you can do about it.
It will be worthwhile perusing Oracle’s upcoming earnings report; it’s the company’s fourth fiscal quarter of 2014.
Oracle is a company that I’ve liked for a number of years as an investment-grade equity security for long-term investors. But the business does experience periods of stagnant growth. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)
I was enthusiastic about this position early last year as a long-term cycle … Read More
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