Fourth-quarter Earnings Season Round-up
Monday, March 5th, 2012
By George Leong, B.Comm. for Profit Confidential
Spain announced that that it was going to miss its deficit targets for 2012. Greece got another $170 billion in cash to avoid defaulting. The financial mess in the eurozone and Europe is real. I expect more shocks down the road from Europe; but, while there is renewed optimism towards the U.S. economy with an improving jobs sector, corporate America is still a concern.
While it’s true there have been stellar performances from Apple Inc. (NASDAQ/AAPL) that are worthy of an Oscar, the truth of the matter is that revenue and earnings growth remains muted.
The fourth-quarter earnings season is drawing to a close and I wouldn’t say companies were overachieving; this is a concern going forward. The stock market is pricing in a strong economic recovery and stability in Europe, but I question the average growth.
With 486 of the S&P 500 companies having reported in the Q4 earnings season, about 63% exceeded estimates, while 27% fell short. This is not what I was hoping for. The Q4 earnings season results are subpar versus the third-quarter earnings season in which 67% of S&P 500 companies beat estimates and 19% fell short. The blended S&P 500 earnings growth rate for the fourth quarter earnings season was 9.4%—well below the earnings growth rate of 15% as of October 3, 2011. The best performing stocks in the fourth-quarter earnings season were found in Industrials, with a blended earnings growth rate of 17.7%, and Technology, at 17.3%. The worst sector was Telecom at -22.8% followed by Materials at -14.2%.
Moreover, companies can increase earnings growth by cutting costs to hide the fact that revenue growth remains an issue. For the first-quarter earnings season, the estimated earnings growth rate for the S&P 500 sits at 2.7%, but will jump to an estimated 8.4% in the second-quarter earnings season, according to Thomson Reuters.
I’m not surprised to see Technology near the top, as growth stocks with new ideas and technologies will always provide the top risk-to-reward return.
Going forward, I continue to believe that technology will be the driver of the stock market going forward into the next several years. While the NASDAQ is up nearly 15% this year, I advise taking any selling as an opportunity to buy stocks on weakness.
I made a list of some of my favored technology stocks. At the top of my list is Apple, which, despite breaking $500.00 a share and becoming the world’s largest company based on market cap, remains long-term positive on superlative results driven by sales of “iPads” and “iPhones.”
Internet star Google Inc. (NASDAQ/GOOG) is the next best choice after Apple. The company is diversifying into other growth areas in mobility with its addition of Motorola Mobility Holdings, Inc. (NYSE/MMI), which should help Google in aggressively pushing sales of its “Android” phones and trying to take some market share away from Apple.
- Since the beginning of July through to Friday, the small-cap Russell 2000 Index has tumbled 8%.
Historically, the Russell 2000 has led the general market lower.
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Chipmaker Intel Corporation (NASDAQ/INTC) is the dominant chipmaker in the world and its concerted move into more mobile applications should pay off.
As I have said, the key will be revenues going forward, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy economy; and I’m concerned this could hamper growth.
The most important markets for Facebook will be China and India given that the two countries account for a third of the world’s population. I like the potential growth in China’s social networking space, as I discussed in China’s Next Potential Moneymaker.
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