The bottom line is turning out to be one of the major stories this earnings season. A tough global environment and the stronger U.S. dollar (which was expected) are impacting sales. But earnings are mostly still coming through.
DuPont and 3M Reporting Decent Earnings, Slow Sales
One company that perfectly illustrates this trend is E. I. du Pont de Nemours and Company (DD), or DuPont, whose share price is right near its high with a 2.5% dividend yield.
In the fourth quarter of 2014, the company’s sales dropped five percent from the fourth quarter of 2013 to $7.4 billion. But even with strong headwinds due to currency translation, operating earnings improved 16% to $649 million, or 20% on a per-share basis to $0.71.
Agriculture is the company’s largest business component. Operating earnings there leapt higher, even though this division’s total sales fell comparatively.
Management cited strong cost control, currency management, and share repurchases as contributing factors to the big earnings-per-share gain.
Clearly, however, the lack of sales growth is a telling problem. All kinds of companies are meeting or beating Wall Street consensus on earnings, but not sales.
It was a similar story with 3M Company (MMM). Sales only grew two percent to $7.7 billion in the fourth quarter, with foreign currency translation affecting top-line growth by 4.4%, according to the company. Organic local sales improved 6.3% over the fourth quarter of 2013 with high single-digit growth in Latin America and Canada, a 6.9% gain in Asia Pacific, 6.6% growth in the U.S. market, and 3.3% growth in Europe, the Middle East, and Africa.
On the other hand, fourth-quarter diluted earnings per share for 3M were $1.81, up 12% comparatively.
This stock is in pretty good shape. Management just announced a 20% increase to its 2015 first-quarter dividend. In 2014, the company bought back $5.7 billion worth of its own shares.
Slow Stock Market Action Suggests It’s Break Time for Stocks
As is typical in the media, negative news dominates. But even with solid earnings beats, the marketplace isn’t particularly interested. This market is tired out, still concerned about oil prices and worried about global growth prospects. (See “Should Investors Focus on Individual Stocks in 2015?”)
The Federal Reserve is likely to consider the impact currency translation is having on corporate financial results and the issue very well might contribute to putting off the expected interest rate hike.
We’ve seen the current trend in financial reporting countless times over a number of quarters now. Companies, especially large ones, are still trying to squeeze costs the best they can. They are more interested in returning cash to shareholders than making big new investments.
It’s tough going in the equity market. Individual stock selection matters. Dividends matter significantly.
It hasn’t been a great start to the year. Investor sentiment is all over the place, and the trading action is choppy. The cycle of investor enthusiasm for stocks is diminishing. What corporations say about their operations (SEC Form 10-Qs are best) is still the best guide for equity investors.
But in the absence of some new kind of monetary intervention or shock, it’s break time for U.S. stocks.