Looking Ahead: Economy Remains a Drag on Corporate America

Economy Remains  a Drag on Corporate AmericaWhile the stock market rallies on optimism towards a resolution to the fiscal cliff, I feel traders are ignoring the problems of slowing growth in corporate America. The reality is that the fiscal cliff will be resolved or the deadline may be extended, but President Obama will need to fix the massive national debt, while also getting people to work and driving the economy.

Earnings season is just around the corner. Alcoa Inc. (NYSE/AA) will be the first Dow stock to report in the fourth-quarter earnings season, as it kicks off with its results on January 9, 2013. The company is one of the world’s top aluminum makers and a good indicator for the global economy, as aluminum is used in many industrial applications, including aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and consumer electronics applications. In the precious metals area, I like Newmont, which you can read about more in “Newmont—the ‘Best of Breed’ of All Gold Stocks.”

In the third-quarter earnings season, Alcoa beat on Thomson Financial consensus earnings, but revenues are an issue, which will likely be the situation with many U.S. companies. For Alcoa, revenues are estimated to fall 6.3% in the fourth-quarter earnings season, followed by a 1.3% rise in the 2013 first-quarter earnings season, according to Thomson Financial.

For the fourth-quarter earnings season, the overall revenue growth is estimated to be three percent, according to FactSet. (Source: “Earnings Insight: S&P 500,” FactSet, December 14, 2012.) This is simply not what you would expect if the economy was healthy. And while there is some hope and optimism for the fourth-quarter earnings season, I expect disappointment.

Based on current estimates, earnings for the S&P 500 are estimated to rise three percent in the fourth quarter, according to FactSet. So far, for the fourth quarter, 79 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, versus only 30 companies reporting positive guidance. (Source: “Earnings Insight: S&P 500,” FactSet, December 14, 2012.)

FactSet also predicts that the top-performing earnings growth for the third quarter earnings season will be in the financial sector.

The two weakest areas of earnings growth in the fourth-quarter earnings season are predicted to be the industrials and information technology sectors.

As in the past quarters, the key in my stock analysis is determining whether companies are growing revenues to drive earnings or cutting costs to support earnings growth. This is critical and could give us a good indication on how well corporate America is actually doing. Based on the soft gross domestic product (GDP) growth, I’m not expecting any major upside surprises.

The reality is that many companies cut costs during hard times, and these companies should be in a better condition now. If the economy was truly healthy, we would see earnings growth driven by revenues. In addition, what the company says about the future is important.

The key is to monitor the companies that are global in nature, especially those that produce the raw materials that are essential to economic renewal, such as copper, energy, iron, forestry, and concrete.

As I have said, going forward, revenues will be critical, especially organic growth. Instead of cost cuts, we want to see revenues grow to drive earnings. Without revenues growing, it is difficult to imagine a healthy economy, and I am concerned that this is what could hamper growth.