We ended our last letter discussing the upcoming barrage of fourth quarter earnings from S&P 500 companies. Now that a substantial number of reports have been released we can analyze the overall theme of results.
As of the end of January, 184 companies released earnings. 59 percent of those companies posted earnings that beat estimates, not bad at all you’d probably think. Unfortunately, it represents the weakest result since the fourth quarter of 2001, which I believe was at the tail end of the recession that year. (Do what you will with that last piece of information).
Earnings expectations grew sequentially in every quarter in 2011 until the fourth quarter (noted in chart last letter). Additionally, the lower earnings expectations have not been exceeded. So what gives?
(And yes, I realize Q4 GDP was better than expected and unemployment improved during the period, thus puzzling me further.)
The culprit looks to be revenue, specifically the lack of revenue growth. Remember, a company can increase earnings by growing revenue or cutting costs. It looks like the later is still in the driver’s seat.
Only 43 percent of companies have beat revenue estimates, down from 59 percent in the fourth quarter of 2010 and 52 percent in Q3 2011. Granted this isn’t rocket science but we can see the theme here; 59 percent of companies beat earnings estimates, but only 43 percent beat revenue estimates. A good chunk of that difference had to be made up somewhere; lower costs.
Considering 243,000 jobs were added to the economy in January and the unemployment rate dipped to 8.3 percent, its lowest level in a few years, we should keep an eye on how this translates into first quarter results. Assuming February and March also put up respectable employment growth; we will keep any eye on costs to see if companies are investing money into their business through additional labor or not.
A growing labor force due to expanding business is the real economic growth we need and would like to see in America. However, revenue growth is the key to that formula.
One last interesting fact about fourth quarter earnings thus far; Apple and AIG alone account for 10 percent of the rise in S&P 500 fourth quarter earnings compared to 2010. Without those earning are up 1.5 percent from a year ago, the weakest showing of 2011.
Your waiting for the revenue analyst,
Mitch Jaworski