Q2 Earnings Clear Low Bar As Demand Still Lags

Investor's Business Daily

Companies are exceeding low earnings expectations for the second quarter, but will have to keep relying on cost cutting to boost the bottom line as revenue growth remains anemic.

With a little more than three-fourths of S&P 500 companies reporting through Friday, analysts at Thomson Reuters IBES expect to see a final earnings tally of 4.3% growth vs. a year earlier.

Corporate warnings heading into Q2 earnings reporting season were especially high. As usual, actual results overall are beating by a comfortable margin. But growth remains sluggish, especially for revenue.

Sales likely will show a 2.2% gain. They were flat in Q1 and have been especially weak in the last year.

"Companies overall have risen above a low bar," said Kate Warne, investment strategist at Edward Jones. "It's not stellar but good enough to help stocks move higher during earnings season.

Q3 should be more of the same. Thomson Reuters IBES currently projects a 6% rise in earnings and a 3.4% for revenues.

"Unless there is a big change in unemployment or a big catalyst for major spending, we are still expecting slow growth," said Greg Harrison, a senior research analyst at Thompson Reuters.

Companies aren't especially bullish about the second half of the year with many reaffirming guidance or just raising the low end of their outlook.

Sales growth was robust early in the recovery, with high-single-digit or low-double-digit gains, helped by easy comparisons. But the economy is slowing down, at home and abroad, dragging down top-line growth.

Corporations continue to find cost and efficiency savings, but that only goes so far with demand barely rising.

Energy companies have been the biggest drag on earnings, with the sector set to have a 9.4% decline as prices for oil and natural gas are down slightly and production hasn't grown as much as expected, according to Warne. Chevron (CVX) on Friday reported a 26% earnings decline, joining ExxonMobil (XOM) and Royal Dutch Shell (RDSA) with lower and weaker-than-expected profits.

Materials and industrials are also lagging, falling 8.3% and 0.1%, respectively, as growth in China slows, weakening demand, according to Harrison.

Technology companies' profit fell 3.7%, hurt by declines in global PC shipments as consumers switch to tablets and smartphones.

Intel (INTC) reported a 28% EPS decline — its fourth straight slide — and forecast flat full-year sales. Microsoft (MSFT) missed on earnings and sales amid sluggish Windows 8 demand and its Surface tablet bust.

Many Internet companies have reported explosive growth, including Facebook (FB) and LinkedIn (LNKD), but they aren't in the S&P 500. Netflix (NFLX) did report big top- and bottom-line gains amid subscriber worries. But Google (GOOG) reported an EPS decline while Yahoo (YHOO) suffered lower revenue.

There are some bright spots amid the mediocrity. Financial earnings are on pace for a 28.5% advance, helped by big banks releasing loan-loss reserves as conditions improve.

"The housing market rebound has benefited them a lot as mortgage financing increases," Harrison said. He also points to the rising stock market as an encouraging sign for investors to start being more active, meaning higher volumes for brokerages.

The rising housing market has also helped boost consumer discretionary spending as homeowners spruce up their homes. Consumer discretionary firms' earnings are on track for an 8.3% gain.

But consumer-staples firms may rise just 3.2% as international sales struggle amid the strong dollar and Europe's ongoing recession.

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