Wednesday, January 23, 2013
The fourth quarter earnings season is in full swing and the overall tone of earnings reports thus far has been quite reassuring – we have yet to see the ugly numbers many of us had started fearing in the run up to this reporting season.
The focus today is on Apple’s (AAPL) report after the close, but in many respects the iPhone maker is not a ‘normal’ company and its results don’t represent the broader corporate world in general or the Technology sector in particular. The strong results from Google (GOOG), IBM (IBM), DuPont (DD) and CSX Corp (CSX) on Tuesday are better representations of what’s happening on the earnings front. In this morning’s batch of reports, McDonald’s (MCD) and United Technologies (UTX) beat on earnings, but missed on revenues, while Coach (COH) came short on both counts.
Google’s results are important because of what they tell us about the impact of the secular shift from the desktop to the mobile interface, which besides Google has been concern with other Technology players like Facebook (FB) and Zynga (Z). The key takeaway from the company’s report is that the persistent downtrend in its average cost per click, the cost that advertisers pay Google each time a user clicks on an ad, over the last many quarters may have started to stabilize. The company’s cost per click dropped 6% in the fourth quarter from the same period last year, a much lower drop than the 15% year over year drop in the third quarter. Sequentially, it was up 2%. This was the reassuring part of the Google report even as it missed revenue expectations.
The scorecard as of this morning shows fourth quarter earnings reports from 98 S&P 500 companies or 19.6% of the index’s total membership that account for 28.7% of the index’s total market cap. Total earnings for these 98 companies are up 1.7% from the same period last year, with 65.3% beating earnings expectations and a median surprise of +2.7%. Revenues are up 5.2%, with 54.1% of the companies coming ahead of top-line expectations with a median revenue surprise of +0.6%. This is better performance than what this same group of 98 companies reported in the third quarter. The composite growth rate for the fourth quarter, where we combine the results of the 98 companies that are out with the 402 still to come, is for a drop of -0.4% in total earnings and an equivalent drop on the revenue side.
Perhaps expectations had fallen enough before the season got underway that coming ahead of them didn’t require much effort. But while that would account for the ratio and magnitude of surprises we are seeing at present, the overall tone of company guidance has not been that bad either. That said, earnings growth has come down to a crawl and margins remain under pressure. We will have to wait and see how the rest of the earnings season unfolds, but what we have seen thus far may not be ugly, but it isn’t necessarily pretty either.
Director of Research
Wednesday, January 23, 2013