August 8, 2013

Jim’s take on second-quarter earnings for US companies

With earnings reporting season almost finished, here are my conclusions:
  1. Things are OK in corporate America, but I am disappointed that more revenue growth did not show up this quarter. I was looking for US-based S&P 500 companies to get more traction in sales, which would help them enormously after all their cost cutting. At this point in the season, year-over-year revenue growth is only 1.3%, not counting the banks. Encouragingly, the percentage of companies showing some revenue uptrend did increase.
  2. Smaller companies that sell their products within the United States did the best while larger, multinational companies had more sluggish results. The market certainly saw this coming and has assigned a much higher multiple to small and mid-sized companies relative to the largest 100 companies.
  3. The slowdown in emerging market countries and the recession in Europe are taking their toll.
  4. Companies have started to borrow more, especially through bank loans, but because their interest costs remain low and their assets and net worth are growing faster than their debt, they have been able to reduce their debt load.
  5. The shining lights are the auto industry, banks and technology firms.
    1. Car sales have not yet reached record highs, but they are getting there, and the combination of a dramatic aging of the auto fleet on the road in 2013 and much better product quality has driven a revival here.
    2. The banks are starting to lend, and the shape of the yield curve (the distance between shorter-term interest rates and long-term rates) has steepened. This favors bank interest margins going forward. Further, better credit quality for both consumers and corporates has reduced write-offs for bad debts; this too is helping the bank sector.
    3. Technology companies, both large and small, performed better than analysts expected and still trade at a lower multiple than the market.
What's next and what do we need to see now?

First, we believe that the stock market needs fundamental support, from higher final demand, moderate interest rates, growing cash flow and accelerating top-line growth to help convert rising revenues into a healthier bottom line. This is necessary in order to improve earnings per share after years of cost cutting. We will be looking first for Europe to climb out of recession in the next two quarters and thereby boost top-line sales.

Second, many US companies export to the major emerging countries, and we need to see an end to the current slump there. We have not seen any evidence of that yet in the numbers.

Meanwhile, the market’s price-to-earnings valuation has risen, unlike the rest of the cycle, when market prices were playing catch-up with earnings. To justify this repricing of equities, the macro environment needs to pick up, and it needs to do it soon.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.


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