As companies in the key stock indices report their corporate earnings for the first quarter of 2013, it appears their revenues aren’t improving. While I know it’s a blanket statement, what this means is that companies are not selling more goods or services; their corporate earnings are being propped up by cost-cutting and financial engineering.
Honeywell International Inc. (NYSE/HON), a big-cap industrial goods company, reported corporate earnings that were 16% higher in the first quarter as compared to the same period of last year. However, revenues for the quarter were flat—with no change in overall sales. (Source: Honeywell International Inc., April 19, 2013.)
Similarly, General Electric Company (NYSE/GE) reported a 16% increase in its first-quarter corporate earnings (though the company did lower its forecast for the year). The company’s revenues were flat in the first quarter over the same period of 2012, and General Electric (GE) experienced a 17% decline in orders from Europe in the first quarter. (Source: Wall Street Journal, April 19, 2013.)
McDonalds Corporation (NYSE/MCD), the fast-food giant, experienced a global sales decline in the first quarter of 2013: sales declined 1.2% in the U.S.; 3.3% in Asia, the Middle East, and Africa combined; and 1.1% in Europe. The chief financial officer (CFO) of the company, Peter J. Bensen, said, “…that battle for market share has become so critical for the long-term heath of business; we’re willing to sacrifice that margin.” (Source: “McDonald’s Profit Rises, but Year-Over-Year Sales Fall,” The New York Times April 19, 2013.)
In the long term, the key stock indices reflect the corporate earnings and revenue growth of public companies, and that growth in earnings and sales just isn’t there right now.
It is also well documented in these pages that companies in the key stock indices are buying back their shares; the end result of this is a boost in per-share corporate earnings. Other companies in the key stock indices are making rigorous cuts to their labor force all in the name of keeping profit growth alive.
Dear reader, cost-cutting and financial engineering can only go on masking the real issue of declining demand for so long. The reality is that we have high domestic unemployment and weak consumer demand; the eurozone troubles are increasing; China’s growth is slowing, and Japan is in an outright recession—all of which are a drain on corporate revenues for American corporations. The year 2013 will prove to be a very difficult year for corporate earnings growth and stock prices will soon reflect this concern.