US second-quarter corporate earnings are outstripping estimates as companies from Apple Inc to Coca-Cola Co boost sales with new products and benefit from a weaker dollar, surprising analysts who predicted a bigger drag from the economy.
Earnings per share jumped 19 per cent from a year earlier for the 122 companies in the Standard & Poor’s 500 Index that reported second-quarter results as of July 22, according to data compiled by Bloomberg. That beat the 13 per cent average growth estimate that analysts held at the start of the month, and about 82 per cent of the companies reporting have exceeded forecasts.
The earnings outlook had been tamped down by analysts because of the earthquake that cut supply lines in Japan, a looming debt crisis in Europe, unrest in West Asia and weaker US economic indicators, said Jonathan Golub, UBS AG’s chief US market strategist in New York.
“It reflects how pessimistic everyone is after the ‘08 crisis,” said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. “Wall Street estimates just can’t catch up to Main Street reality because we can’t believe it’s actually that good.”
Analysts in the past week began to raise projections for the second quarter after companies started reporting better- than-anticipated results. The average earnings-per-share growth estimate for the quarter reached 17 per cent at the end of last week, up from 13 per cent a week earlier, according to Bloomberg data. Revenue is projected to have risen about 10 per cent.
‘BRIGHT LIGHT’
Companies have kept costs low, increased use of existing factory capacity and tapped into faster-growing markets abroad, Golub said in an interview. Across industries, companies are coaxing sales gains out of consumers who look weak on paper, he said.
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US unemployment rose to 9.2 per cent in June, the highest level since the end of last year, and the University of Michigan’s consumer confidence index dropped to 63.8 points in July, a two-year low.
Cupertino, California-based Apple reported on July 19 net income of $7.79 a share, beating analysts’ forecasts by $1.92 on record sales of iPhones and iPads. Coca-Cola, the world’s largest soft-drink maker, said the same day that its profit rose 18 per cent, more than projections. Earnings were boosted by a 47 per cent jump in sales, helped by an acquisition last year that gave the Atlanta-based company control of 90 per cent of its North America beverage distribution.
“The companies are doing an extraordinary job of managing themselves,” Golub said. “This is a bright light in the distance of a murky macro environment.”
TAPERING GROWTH
The S&P 500, which rose 5.4 per cent in the first quarter, fell 0.39 per cent in the second quarter. The best performing stocks in the quarter include National Semiconductor Corp, Biogen Idec Inc and Expedia Inc. The worst performers include Micron Technology Inc and MEMC Electronic Materials Inc.
Earnings growth may taper in the second half, when companies have to spend more to expand factories and hire workers, said Gina Martin Adams, an equity strategist in New York with Wells Fargo & Co Companies will also meet resistance among consumers when they begin to seek price increases to make up for higher material costs, such as energy and aluminum.
Of the companies in the S&P 500 that have reported, 20 of them, including Goldman Sachs Group Inc and Caterpillar Inc, reported profit below analysts’ average estimate. The misses were specific to the companies, rather than to the broader industries, Golub said.
A drop in fees from trading debt, currencies and commodities caused Goldman to report earnings last week that fell 45 cents a share short of the $2.30 average estimate. The New York-based company said it will eliminate about 1,000 jobs.
CATERPILLAR MISSES
Caterpillar reported on July 22 profit excluding some costs of $1.72 a share, trailing the $1.75 average of analysts’ estimates. The Peoria, Illinois-based company’s shares fell the most in about 15 months that day.
“The quarter was very messy, with a low tax rate, losses on interest-rate swaps, and various impacts from” Caterpillar’s acquisition of Bucyrus International Inc., said Stephen Volkmann, an analyst with Jeffries & Co in New York.
Caterpillar, betting demand for construction equipment will improve, increased its guidance for the year, excluding the acquisition, by 50 cents to a range of $6.75 to $7.25.
WEAK DOLLAR
A weak dollar is fuelling some of the positive earnings reports. International Business Machines Corp posted a 12 per cent sales gain to $26.7 billion in the quarter, topping analysts’ forecast of $25.4 billion of revenue. The gain would have been five per cent after stripping out the currency effect.
“What the consensus missed was how positive an impact on reported revenues the overall weakness in the dollar would have,” said Douglas Cliggott, US equity strategist in Boston for Credit Suisse Securities USA LLC.
The euro gained 19 per cent on the dollar in the 12 months ended June 30.
Sales in the S&P 500 will rise to $1,041.45 a share this year, the highest ever, analyst estimates show. Earnings for the full year are forecast to gain 18 per cent to $99.60 a share. Profits from all countries in Europe represent about $17.92 of that amount, data from Bank of America Corp and Bloomberg show.
McDonald’s Corp, the world’s largest restaurant chain, posted earnings per share of $1.35, outpacing an estimate of $1.28 from 22 analysts, on the back of increased sales from McCafe coffee and frozen drinks.
HIGHER PRICES
“As we move through the year, we will continue to consider future price increases, balancing our desire to maintain growth and guest counts in market share amidst rising input costs,” Peter Bensen, McDonald’s chief financial officer, said in a conference call with analysts on July 22.
Consumer are likely to balk at the higher prices companies will need to maintain profit margins, said Martin Adams of Wells Fargo. That may slow earnings growth in the third and fourth quarters, she said.
“These companies will start to test the market to try to pass on price increases,” she said. “There will probably be pushback from ultimate consumers and that’s going to cause some disruption to some of these earnings trends we’ve been accustomed to.”
Concern about US economic growth, a debate on the US debt ceiling and a hot spell flogging most of the country haven’t dampened investor enthusiasm over company earnings, Keith Wirtz, chief investment officer for Fifth Third Asset Management in Cincinnati. The resilience of company earnings drive gains in the S&P 500, said Wirtz, who helps manage about $16.7 billion.
“It’s going to be a good earnings season,” Wirtz said. “It’s going to be a continuation of six or seven quarters of above average earnings results and that’s potentially going to provide a floor for the stock market for the rest of the year.”