How Are Earnings Shaping Up?

The third quarter earnings season is upon us and again the key will not only be the earnings, but also revenue growth and guidance going forward into the fourth quarter and 2011.

As I have said numerous times in the past, in a healthy economic recovery, there needs to be increased business activity, which means revenues need to be growing at a decent clip. As far as the earnings side goes, you want to see strong organic growth and earnings driven by higher revenues and not merely by cost cuts. Companies that are growing generally are increasing their expenditures to drive the higher business volume.

Alcoa Inc. (NYSE/AA), the first DOW company to report, managed to beat earnings per share (EPS) estimates while reporting revenue growth of 15% year-over-year. Moreover, the company increased its forecast of global aluminum demand for 2010 to 13% from 12%.

In the key technology space, bellwether chipmaker Intel Corporation (NASDAQ/INTC) managed to beat on both its third-quarter revenues and EPS. Earnings per diluted share of $0.52 were $0.02 above estimates. A closer look reveals that the amount the EPS beat estimates in the third quarter was the lowest margin in the last four straight quarters, and this causes me some concern.

Intel’s revenues of $11.1 billion were a record and ahead of the $11.0-billion estimate. It was the first time Intel broke $11.0 billion in revenues in a quarter. Looking ahead to the fourth quarter, revenues are predicted to come in around $11.4 billion, which would place it just above the Street estimate of $11.33 billion. Wall Street estimates revenue growth of only 3.3% in 2011. This is not exactly what you want from a leading technology company. The results from Intel were decent, but not explosive or indicative of a growth stock. In my view, I would rather look for growth in smaller technology companies that are earlier in their growth stage.

Banks also get a boost after strong earnings from JPMorgan Chase & Co. (NYSE/JPM), which reported a 23% year-over-year rise in its third quarter EPS, which easily beat Wall Street estimates by $0.11. A negative was that JPM was short on revenues; but this is not a big deal given the hurdles that banks have been facing following the subprime crisis. Wait for Citigroup, Inc. (NYSE/C) and Bank of America Corporation (NYSE/BAC) to report their earnings next week. A stronger banking sector could give the stock markets some leadership.

Continue to monitor the quarterly results. Markets need some strong results to support the rally and sustainable gains.