We are seeing soft revenue growth or declines across the board despite the fact that about 65% of the reporting S&P 500 companies have beaten earnings per share (EPS) estimates as of July 25. In my view, the number would be much lower if not for the fact EPS estimates were cut. If you compare the year-over-year numbers, the earnings season has not been that good.
Take a look at the revenue side. Only about 45% of these S&P 500 companies have beaten the revenue estimate during the second-quarter earnings season, well below the average of 63% over the previous four quarterly earnings seasons, and so far, the second-quarter revenue results are the weakest since the 2009 first-quarter earnings season. This is a red flag and clearly suggests global economies are stalling.
What I have noticed is not only the poor revenue showing, but also the fact that large-cap technology companies are showing muted demand for technology spending.
The results from some of the top technology companies during the current earnings season indicate a worrisome situation.
The hopes were resting with Apple Inc. (NASDAQ/AAPL), but results fell short. I’m not surprised, as even the top companies see some stalling at some point. Longer-term, Apple remains the company to beat. (See “Apple’s China Ventures Keep it at the Top of My Stock List.”)
The miss by Apple may have been due to consumers delaying purchases and waiting for the debut of the “iPhone 5” that is rumored to be in September.
Some argued consumers are buying the lower-priced Apple “iPhones” and “iPads,” instead of the newer and pricier versions. Maybe having an “iPhone 4S” is not that important anymore for users of the “iPhone 4” like myself. If the same happens to the iPhone 5, Apple could be in for some downside moves. Revenues of $35.0 billion were short of the $37.2 billion estimate. Earnings of $9.32 per diluted share came in well below the consensus of $10.36 per diluted share. A plus was that the year-over-year numbers were higher.
Some Apple users will also be upset the iPhone 5 will use a 19-pin dock connector instead of the traditional 30-pin connector. This means that you will need to upgrade such things as your Apple car charger and other accessories that use the 30-pin connector.
Streaming video provider Netflix, Inc. (NASDAQ/NFLX) traded at $270.10 on July 28, 2011, driven by superlative subscriber growth. That was then. A slowing in subscribers due to increased competition from alternative platforms such as Apple TV is killing Netflix. The stock traded at $57.00 on Thursday, down $213.00 or 79% from its 52-week high. The bears are quite happy, and there could be more short profits down the road, as the company is predicting a loss in the third-quarter earnings season.
Other large-cap companies that fell short on the revenue end included QUALCOMM Incorporated (NASDAQ/QCOM), Intel Corporation (NASDAQ/INTC), Yahoo! Inc. (NASDAQ/YHOO), Google Inc. (NASDAQ/GOOG), Johnson & Johnson (NYSE/JNJ), and General Electric Company (NYSE/GE).
Bearish economist Nouriel Roubini (aka Dr. Doom) is calling for “below trend growth” to come for years.
Even China’s companies are hurting with profit warnings. Earnings at Chinese state-owned companies declined 11.6% in the first- and second-quarter earnings seasons, according to the Ministry of Finance. The situation could worsen as the demand for Chinese goods falls.
And as we move ahead to the third-quarter earnings season, S&P 500 companies are estimated to fall 0.1% year-over-year compared to the 3.1% forecast as of July 1, according to Thomson Reuters Corporation (NYSE/TRI). This would be the first earnings decline since the 2009 third-quarter earnings season.
Get set for a bumpy ride.