Spotted: A Sudden Turnaround in Earnings Trends
Fewer than two-thirds of companies in the S&P 500 index that have reported their earnings for the fourth quarter of 2011 have managed to beat analysts’ expectations, but the percentage of companies delivering this kind of good news has suddenly surged in the last week, with a broad array of companies handily trouncing analysts’ forecasts.
Of the 70 companies in the S&P 500 that that reported their results in the last week, a remarkable 78.6% beat estimates. That level is significantly higher than the average for the 352 companies in the bellwether blue-chip index that have reported their results thus far in the fourth-quarter “earnings season”. As of the end of last week, that figure rose an entire percentage point, to 63% from 60% a week previously. That is still a disappointing level, as it’s the weakest showing since the fourth quarter of 2008, when corporate America was still struggling with the financial crisis and the subsequent recession. (Over the longer term, an average of 62% of companies in the S&P 500 report better earnings than analysts had anticipated.)
Not only are the overall results of the past week encouraging, but the better-than-expected results are being posted across the board. As can be seen the chart below, at least 60% of the companies in each of the nine sectors beat estimates.
The chart below shows clearly the trend this quarter – as the weeks have passed, the “beat rate” has steadily increased. This was largely due to the fact that companies in the Consumer Discretionary, Financials, and Consumer Staples sectors have had a large numbers of companies reporting more recently, and that companies in those sectors have beaten analysts’ estimates more readily.
Companies whose fate is tied to the willingness of consumers to spend tell a different and more upbeat story than the most recent economic indicators would suggest might be the case. True, the Thomson Reuters/University of Michigan consumer index posted its own unpleasant downside surprise today, falling to 72.5 from 75.0 in January. But of the 13 companies in the Consumer Discretionary sector that reported earnings this week, all but one beat consensus estimates. The Walt Disney Company (DIS), for instance, reported earnings of 80 cents a share; analysts had been expecting the company to report it earned 71 cents a share. Guests at the company’s resorts are spending more, the company’s chief financial officer, Jay Rasulo, told analysts during the company’s earnings conference call. The growth in operating income also came from “higher passenger cruise days driven by the Disney Dream, partially offset by higher costs.” (Subscribers to StreetEvents can obtain a complete transcript of the February 7 conference call.)
Yum! Brands Incorporated (YUM), which opened a new store every 13 hours in China during 2011 – expects Chinese aficionados of its pizza and fried chicken to drive further growth at its still-expanding roster of KFC and Pizza Hut restaurants in that country. The company recently acquired the Chinese hot-pot chain Little Sheep, expanding its offerings in different food categories. “The macro environment continues to work in our favor in China,” explained David Novak, the company’s CEO, during its earnings call. “Rising incomes are making our brands even more affordable for an increasing number of people. In fact, the consuming class is expected double over the next 10 years going from 300 million to at least 600 million people as significant urbanization continues.”
Within the Consumer Staples sector, another 13 companies reported their fourth-quarter results this week, eight of beat analysts’ estimates. Consumers’ appetites for soft drinks and snacks buoyed results at both Coca-Cola Company (KO) and PepsiCo Incorporated (PEP); Both companies beat their earnings estimates. PepsiCo’s upbeat earnings was accompanied by a corporate announcement that 8,700 employees will lose their jobs as it tries to rein in costs and revamp the organization in order to regain its market share in North America.
Looking ahead to the next earnings season, in which companies will give investors a glimpse of how they are faring in the early months of 2012, the number of companies offering downbeat guidance continues to exceed those steering analysts’ forecasts higher. So far, 52 companies in the S&P 500 have issued negative earning guidance compared to 20 that have issued positive earnings guidance for the first quarter of 2012; the resulting ratio of negative to positive preannouncements is 2.6. While that’s still not telling investors that corporate executives are bullish, it’s a significantly more positive reading than the N/P ration of 3.6 observed as recently as last week. The improvement is due to the fact that several companies issued positive guidance this week, including CVS Caremark Corporation (CVS), FMC Corporation (FMC), Hartford Financial Services Group (HIG), and Cisco Systems Incorporated (CSCO).
FMC Corporation not only delivered a positive earnings surprise for the fourth quarter of 2011 but also revised upward its own forecasts for the first quarter of 2012, thanks to the strength of its agricultural products division. Within that division, CEO Pierre Brondeau told listeners to its earnings conference call yesterday, “we look for first-quarter earnings to be up approximately 20%, reflecting robust early season demand in North America, coupled with the expected shift to some sales in the region from the second quarter; a strong finish to the crop season in Brazil, and volume gains in Asia and EMEA.”
Hartford Financial Services Group delivered the same double-whammy: beating earnings forecasts and issuing positive guidance for the first quarter of 2012. The improved outlook is thanks to improved results from its alternative investment portfolio and lower catastrophe and weather–related losses on its insurance operations.
Of course, corporate executives tend to put a positive spin not only on past results but on their future prospects. The sharp improvement in the rate at which S&P 500 companies are beating earnings estimates for the fourth quarter of 2011 is an intriguing sign; more significant will be whether companies guide future estimates higher or lower. A company that beats an estimate that it has guided lower over the period is a less impressive signal of improving corporate earnings than one that has beaten or even matched estimates that it has raised, or hasn’t tried to suggest that analysts should reduce.