Corporate earnings worldwide haven't been the disaster analysts predicted as companies from Ford Motor Co to Siemens AG beat earnings estimates through job cuts, factory consolidations and a dose of lowered expectations.
"It's one of those things where you walk away from the car crash and think, "Well, that could've been a lot worse," said Andy Lynch, who helps manage about $5 billion at Schroder Investment Management Ltd in London. "The first quarter is marginally less catastrophic than feared."
Some 188 members of the Standard & Poor's 500 Stock Index have topped analysts' estimates, or 69 per cent of the 271 companies reporting so far. That's more than the 62 per cent for all of the previous quarter, Bloomberg data shows. In Europe's Dow Jones Stoxx 600 Index, half of the 110 members reporting so far beat estimates, up from 38 per cent in the previous quarter.
One reason is the low hurdle the companies set earlier this year by reducing forecasts, rather than any recovery from the deepest US recession in a half-century, investors and analysts said. At the start of April, equity analysts estimated earnings among S&P 500 companies fell 37 per cent in the first quarter. Six months earlier they had been calling for a 22 per cent gain.
"At the end of last year companies took a much more conservative stance," said Michael Jaffe, the senior director of industrial research at Standard & Poor's in New York. "They were being ultraconservative and looking at the worst-case scenario. That would give them an opportunity to beat estimates. They didn't want to try and promise too much, which was probably a smart move."
Shedding Jobs
US employers have eliminated about 5.1 million jobs since the slump began in December 2007 in an effort to cut costs. US gross domestic product dropped at a 6.1 per cent annual pace in the first quarter and a 6.3 per cent rate in late 2008, the Commerce Department said yesterday. European unemployment increased in February to 8.5 per cent, the highest in almost three years.
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Texas Instruments Inc, the second-largest computer-chip maker, on April 20 reported net income of 1 cent a share instead of the 4-cent loss that was the average estimate in a Bloomberg survey of analysts. The Dallas-based company in January announced plans to eliminate 12 percent of its jobs and in March forecast a loss of as much as 8 cents a share.
"The industry has a much better ability to adapt to slowing demand than we as analysts were able to model," said Doug Freedman, an analyst at Broadpoint AmTech in San Francisco. "They were able to reduce their expenses at the same time as they worked down their inventory levels."
Technology Companies
Texas Instruments reduced costs by $115 million in the quarter, more than double the target of $40 million, Ron Slaymaker, its manager of investor relations, said in an interview. The company has gotten costs "realigned with the realities of the economic environment," he said.
Technology companies learned lessons from the industry's bust earlier in the decade, when many were too slow to cut expenses, said Heather Bellini, a UBS Securities LLC analyst in New York. "Most of the companies, not all, have taken a much more aggressive approach as soon as they saw business start to decline," Bellini said.
Munich-based Siemens, Europe's largest engineering company, said operating profit at its main units rose 43 per cent to ¤1.84 billion ($2.45 billion), ahead of analysts' average estimate of 1.66 billion. Some 19,000 workers will be on shorter shifts by mid-year, Chief Executive Officer Peter Loescher said. He's cutting costs in purchasing and administration to offset a slide in demand for automated factory controls and lighting.
Europe's Stoxx 600, up 1.5 per cent on Thursday, is poised for the biggest monthly gain on record as German chemical supplier BASF SE joined the ranks of companies whose profit excelled.
Narrower Losses
Stockholm-based Electrolux AB and Dearborn, Michigan-based Ford were among the companies that beat estimates even while posting losses.
Electrolux last week climbed to its highest stock price in seven months after reporting a net loss that was narrower than analysts predicted. The world's second-biggest appliance maker cut 2,000 jobs and moved factories.
Ford shares rose 11 per cent on April 24 after the second- largest US automaker reported a loss of 75 cents a share, excluding items it considers one-time costs, narrower than the $1.24 loss analysts predicted.
Ford, the only US automaker not on federal aid, reduced its worldwide employment by almost 4 per cent in the quarter to 205,000 from 213,000 at the end of the year and cited $1.9 billion in savings, including more-efficient manufacturing. Midcontract concessions won in March will allow consolidation of vehicle assembly at two Michigan factories.
Health-Care Earnings
Out of 24 industry groups in the Standard & Poor's 500 index, 21 groups have so far reported a lower average profit for the quarter and only three had gains: health care, real estate and utilities.
Drugmakers turned in estimate-beating earnings built upon job cuts, plant closings and price increases adopted in recent years, said Les Funtleyder, a Miller Tabak & Co health-care analyst in New York.
New Brunswick, New Jersey-based Johnson & Johnson, the world's largest health-care company, began paring as many as 4,400 jobs in 2007. New York-based Pfizer Inc has cut 14,000 positions since then. Bristol-Myers Squibb Co, also of New York, has said it plans to remove $2.5 billion in costs over the next three years. All three beat profit estimates even as they said top-selling drugs lost sales to generic competitors in the first quarter.
Potential Red Flag
Heerlen, Netherlands-based Royal DSM NV, the world's largest maker of vitamins, earlier this week said operating profit plunged 76 per cent to ¤57 million, exceeding the average estimate of 51 million euros. The company said it plans to cut 250 jobs beyond the 1,000 reductions already announced.
Far from being a buy signal, sometimes earnings that beat estimates should be a "major red flag for investors" because they were achieved by cutting costs that may restrict growth, said David MacGregor, a Longbow Research analyst in Independence, Ohio.
"The assets they are closing or rationalizing today, a year ago they would have said they needed for the recovery phase," MacGregor said. "Recovery is not imminent, and is far enough into the future that they are re-sizing the business to a much lower level."