the S&P 500 had been beating earnings estimates at a higher rate than in
a typical quarter, providing ammunition for those who believe that
bottom-line growth is what has been driving share prices higher. But a post at
Thomson Reuters' Alpha Now blog gives us a
slightly different take on the recent "good news":.
second-quarter reports may not be as rosy as these figures make them seem,
however. That’s because underneath the headline-grabbing growth in
profitability, it’s clear that companies aren’t doing nearly as
good a job when it comes to beating analysts’ expectations on the
revenue front. Last week’s crop of second-quarter earnings reports from
industrial companies – one of the strongest sectors in the market, of
late – reinforced that trend, with ten of the 12 S&P 500
Industrials companies that announced results last week posting better-than-expected
earnings but only three saying that their revenue came in ahead of
beginning of earnings season, analysts were predicting that industrials
companies – as a group – would generate 6.4% growth in revenues,
putting them third among the ten sectors in the index. So far, however, only
26% of industrials companies have announced revenues that were higher than
analysts’ forecasts, and that revenue growth rate was only 5.5% as of
the end of last week. To produce higher earnings on lower-than-anticipated
revenues requires companies to boost their margins, and indeed, industrials
in the S&P 500 have seen their net margin climb from 8.6% to 9%.
That may have
been OK up until now,. but
amid clear evidence that the global economy is slowing down, notes blogger
Greg Harrison, the top line that may soon matter more.
To the extent
that companies aren’t able to support earnings growth via higher
revenues, companies will have to rely increasingly on boosting efficiency or
cutting costs – or run the risk of disappointing investors on the
earnings front as well as on revenues in the future. The trend taking shape
in corporate revenues serves as a reminder of a growing source of risk to
corporate earnings as 2012 moves forward.
Of course, if
all you care about is which rabbit Uncle Ben is going to pull out of his hat
at the next Fed meeting (or whenever he feels like it), then please ignore
the foregoing and carry on as before.
Michael J. Panzner