3Q 2009 Earnings: When Are The Customers Coming Back?

After 2009's second quarter, U.S. corporate earnings provided some pleasant surprises to the stock market. The better-than-expected profits generally were the result of cost cutting (giving us today's high unemployment), but investors were not choosy about the source of the profit strength and took stocks higher. Commentators did emphasize at the time, however, that third and fourth quarter 2009 earnings would need to demonstrate a pickup in demand in the economy, in the form of revenue gains, to sustain the rally. In the reports so far, the bottom line has been adequate, but the revenues are still weak. When are the customers coming back?

This earnings season is about two weeks old, and something like 150 more companies are scheduled to report this week, but we've already got a good sample:

Or should I say an adequate sample: revenues are up at just five of these 15 household names.

In the consumer non-durable sectors, Apple Computer's revenues were up 24 percent from 3Q 2008, although they weren't as high as the company had forecast. Amazon, on the other hand, did much better than expected with a 28 percent increase; successes with the latest Dan Brown title was given credit, as well as consumers' general search for value in areas such as home electronics. McDonald's worldwide revenue fell four percent from 2008, but same store sales measured in home currencies were up four percent.

Procter & Gamble has yet to report, but Nestle said it managed "organic growth" in revenues (that is, excluding companies they acquired) of about four percent for the first nine months. Apparently luxury pet foods are selling well.

At Whirlpool, however, a maker of consumer durables, sales dropped eight percent. This was slightly better than forecast.

The industrial companies' revenues are still way down: 3M, Caterpillar, General Electric and Corning all showed decreases. The companies that move their stuff around were off as well: two large railroads saw revenues fall in the mid-20s, on volume decreases in the high teens.

Companies making must-have products did well: pharma giant Merck had a two percent increase in sales, and Raytheon's revenues on missiles and such were up six percent, although bookings and backlog dropped off considerably.

Verizon reported a 10 percent gain in revenues today, but the market didn't receive it well. Based on personal experience I have my own doubts: two weeks ago Verizon called and offered me a month's "free" wireless phone service if I renewed my contract a few months early. They also managed to upsell me a fancy new phone.

However, the economic team at Northern Trust in Chicago assures us that the recovery has commenced, and will be confirmed in the upcoming GDP report. They cite the most recent report on the Index of Leading Economic Indicators (the relevance of which I pondered last week), as well as the Chicago Fed National Activity Index; the latter's three-month moving average has moved out of the territory historically associated with recessions.

But unemployment is still high, and the weekly reports of new claims aren't dropping as fast as the forecasting community would like. If the stock market is going to sustain its rally, corporations will have to sell more stuff, and they won't manage that without people going back to work.