The rate at which companies are beating analysts’ forecasts slid last week, but still remains well above average at 72%, thanks to robust results posted by a range of industrial companies in the first quarter of 2012. With more than half of the companies in the S&P 500 index having reported their results for the first three months of the year, those figures are still much better than market participants had expected prior to kickoff of this quarter’s earnings season. Still, while as recently as last week it seemed as if the highest percentage ever of S&P 500 companies would report upside surprises, this week the “beat rate” fell to 72% from 80% last week, as seen in the chart below. That figure is still significantly higher than the average rate of 62%, recorded since 1994, as well as the average 68% “beat rate” for last four quarters.

It isn’t just the rate at which companies are delivering positive surprises that is encouraging but also the rate of growth. As of the end of last week, the blended earnings growth rate for the S&P 500 has reached 7.1%, up from 4.6% a week earlier.

Of the S&P 500 companies that reported their quarterly results last week, 66% announced a stronger bottom line than analysts had anticipated. As shown in the chart below, this time it was companies in the Industrials sector who led the way higher, as 77% of the 30 companies that reported last week beat analysts’ estimates. The sector also has the highest earnings growth rate of any other within the index, of 17.6%.

The good earnings news came from all parts of the Industrials sector. Staffing agency Robert Half International Inc. (RHI.N) posted earnings of 34 cents a share, 89% higher than the year-earlier period and significantly above the analyst consensus forecast of 28 cents a share. The overall unemployment rate may still be relatively high, but the company’s CEO, Max Messmer, told the audience on the company’s earnings conference call that it is benefitting from ” a supply and demand imbalance” that is emerging in many professions within the United States. “Unemployment rates for a number of positions in accounting and information technology, for example, are less than half of the overall US rate,” Messmer pointed out. That benefits Robert Half, which is called on to help fill vacancies in these fields.

Slower growth in China didn’t put a damper on profits in the Construction & Farm Machinery & Heavy Trucks sub-industry. True, international markets are more difficult, but Caterpillar (CAT.N) was one of several companies that posted positive surprises: its profit of $2.37 a share was 11% higher than analysts had projected. The company’s sales to China were lower than they were in the year-earlier period, but Mike DeWalt, Caterpillar’s director of investor relations, warned conference call participants not to read too much into those numbers. “Remember, slower growth in China does not mean their economy is shrinking,” he said. “In fact, it is growing faster than most of the world.”

PACCAR Inc. (PCAR.O), a manufacturer of heavy trucks, reported that its earnings soared 72% over year-earlier levels, to hit 91 cents per share. Mark Pigott, the company’s CEO, noted in the wake of the earnings announcement that freight traffic on Germany motorways is at levels comparable to last year, despite the eurozone’s economic woes. That, he says, indicates that “freight traffic throughout the eurozone is at good levels and our customers are generating profitable results.”

Raise the subject of government spending and you’re likely to trigger a political argument in the current environment. Nonetheless, the topic looms large when pondering whether to buy or sell stock in companies whose revenues and earnings rely on government spending. In the absence of a budget agreement, automatic spending cuts may appear closer on the horizon than many would like; nevertheless, earnings among companies in the Aerospace and Defense sub-industry remain robust. Eight of the nine Aerospace/Defense companies that reported last week announced earnings that were higher than analysts’ estimates and Raytheon Co (RTN.N) CEO William Swanson took advantage of the opportunity presented by the company’s post-earnings conference call to warn against writing off defense contractors. He suggested investors remember that this is “an industry that does not change dramatically overnight. You have to look at companies’ backlogs, you have to look at companies’ programs.” The attitude wasn’t quite as upbeat at Boeing Co (BA.N), where CEO Jim McNerney mentioned that the company is offsetting downward pressure on margins from shrinking defense budgets by emphasizing other businesses and customers. “Global demand for commercial airplanes is strong and growing,” he said. “Emerging markets are driving the expansion of airline fleets worldwide, growth that is complemented by the ongoing retirement and replacement cycles for airplanes in developed markets”.

Now that more than half of the S&P 500 companies have reported their results for the first three months of the year, the financial markets will be waiting anxiously to discover whether the relatively robust trend will be sustained – and just as importantly, whether managers of these businesses are taking an upbeat perspective on the future or sending out signals that investors should prepare for stormier weather ahead.

 
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