Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Earnings: Not as Impressive as You May Think

Wednesday, April 25th, 2012
By for Profit Confidential

earnings growthThe media is giddy about the first-quarter earnings season—how 80% of the 121 S&P 500 companies have reported beat Street estimates, demonstrating the strength of the economy.

The headline from Tuesday morning on Yahoo! read “Wall Street Gains as 3M, AT&T Boost Dow.” Yet, while I’m encouraged by the earnings season early on, there are still 379 S&P 500 companies to report and my feeling is that the results so far have been average. In reality, seven out of 10 S&P 500 groups have recorded negative earnings growth this earnings season.

Moreover, a major reason why the earnings season looks as good as it does is that the earnings estimates were lowered to compensate for the still somewhat sluggish economy. The results only indicate that companies were able to beat lower Street expectations.

The whisper estimate for how many stocks would beat estimates in the first-quarter earnings season was around 75%, so the 80% was in fact good, but not as explosive as many are saying. The average percentage of those that beat estimates since 2009 has been 77%—again, not far from the current 80%. The 62% reading in the fourth-quarter earnings season was the lowest in 10 years.

And then we have the actual earnings growth, which has not been as impressive as the market believes. Based on the current estimates, the earnings outlook for growth is estimated to be 4.6% in the first-quarter earnings season, following 9.2% growth in the fourth-quarter earnings season and an estimated 5.5% as of January 1, according to Thomson Reuters.

Take at look at 3M Company (NYSE/MMM), which rallied on its results. First-quarter sales were a record $7.5 billion, but that represents year-over-year growth of a mere 2.4%. Earnings grew at 6.7%, which again is nothing to get too overly excited about.

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Then there’s AT&T Inc. (NYSE/T) reporting earnings growth of 5.8% on flat revenue growth of 1.8%.

Electronics manufacturing systems company Celestica Inc. (NYSE/CLS) exploded up over eight percent on Tuesday after beating on both revenues and earnings per share. This in spite of revenues declining 6.1% year-over-year and the company guiding its second-quarter revenues to below the consensus estimate.

Highly anticipated social media darling Facebook is set for its initial public offering, but it could be a bit rocky after the company surprised investors and analysts with a quarter-to-quarter slide in revenues.

The key in my view is that companies need to grow their revenues to drive earnings growth instead of aggressive cost cuts to make earnings look better. So, while the first-quarter earnings season appears to be stellar, the actual muted earnings growth tells another story.

In other words, “never judge a book by its cover.”

As such, the charts show hesitation and risk, which I discussed in Chart Risk is Real. (PC041512)

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles