Corporate Earnings: Something Good Must Be Happening

Last Updated Jul 22, 2009 1:03 PM EDT

Tis the season for public companies to report quarterly profits, and in keeping with the rest of the U.S. economy, the picture is "less bad" than six or 12 months ago. (It's still a limited sample, however, based on results of about one-fifth of the S&P 500.) Few companies are showing absolute gains in profits, but many are exceeding the estimates of Wall Street analysts.

The media giant Thomson Reuters tracks the details of earnings, and at noon today, of the 111 S&P 500 companies already having reported, about one-third showed earnings higher or in line with a year earlier, while two-thirds showed decreases.

The shortfall is both broad and deep. Giving the current situation historical context, the U.S. portfolio strategy group at Goldman Sachs observes that

...the current cycle represents the worst profit contraction since World War I and the Great Depression. S&P 500 LTM earnings have already declined by 53% since their peak in June 2007, marking the third worst contraction in the past century.
Much of the drop, they say, is accounted for by the massive writeoffs at financial companies. But it doesn't stop there: for the S&P 500 as a whole, profit margins have fallen from a peak of from a high of 9.4 percent in June 2006 to a low of 6.2 percent in March 2009. Goldman notes the drop would have been much worse without tactical reductions in SG&A expenses averaging 3.3 percent.

Here are a few household-name examples of the mixed picture -- year-over-year comparisons of companies in the Dow 30 that have reported June 2009 results. (Most are first half 2009 earnings per share versus first half 2008, as compiled by 123jump.com; a few compare three quarters or a full year. Companies showing increases are in bold.)

Retail: Home Depot down 25%; Wal-Mart up 8%

Pharma: Pfizer down 10%

Consumer Staples: Procter & Gamble up 27%; Coca-Cola up 9%

Technology: Cisco Systems down 11%; Microsoft down 10%; H-P up 18%

Industrials: Boeing down 18%; Caterpillar down 87%; GE down 47%


In this group of 11, profits are down at seven. Accordingly the DJIA is down 21 percent compared to this time last year, while the S&P 500 is down 24 percent.

To fulfill the "good things" alluded to in my headline, however, consider that a supermajority of companies are ahead of plan: relative to expected earnings, 71 percent beat analyst forecasts while 20 percent fell short (9 percent were in line). Again, thanks to John Butters, head of U.S. equity research for Thomson Reuters.

And going forward, Goldman Sachs's prognosticators have come out of the foxhole and increased their profit forecast for corporate America:

We are raising our 2009 and 2010 operating earnings estimates for the S&P 500 to $52 (from $40) and $75 (from $63) reflecting year/year growth of 5% and 45%, respectively. The $12 per share increase in our profit forecast for each of the next two years stems primarily from a lower estimate of provisions and write-downs in the Financials sector.
Excluding the financial stocks, Goldman expects earnings of S&P 500 companies to drop 22 percent for full year 2009, but recover by 23 percent in 2010. Strongest earnings gains are projected for the materials, energy, consumer discretionary, and information technology sectors.

Goldman also looks for the stock market to rise:

We are increasing our year-end 2009 price target for the S&P 500 to 1060 from 940 reflecting a potential price return of approximately 13% from current levels. To put our price target in context, a S&P 500 return of 13% over six months would be in-line with the 14% mean return during the six-month long "sustained rally" recovery periods after the five bear markets since 1970.
Goldman sees the best stock returns in those sectors with the best earnings gains, with the exception of consumer discretionary: the removal of General Motors from the S&P 500 makes the earnings gain for the sector look bigger than it really is.

I suppose we should listen to Goldman; even though everyone has put them in the doghouse lately for not acknowledging the role of bailout funds in their record profits, they still look like the smartest guys around.