What's Wrong with the Earnings Picture?
Wednesday, January 22, 2014
It’s all about earnings at this stage and the market doesn’t seem to be getting very impressed with what it is seeing. This is a little strange as what we are seeing in the current earnings season is not materially different from what we saw in other recent quarters. Perhaps the thing that is different is that investors are paying a lot more attention to earnings in the post-Taper world.
Including this morning’s reports from Coach (COH), United Technologies (UTX) and others and last evening's IBM (IBM) report, we now have Q4 results from 75 S&P 500 members that combined account for account for 23% of the index’s total market capitalization. Total earnings for these companies are up +23.9%, with 65.3% coming ahead of consensus earnings expectations. Total revenues are up +1.9% and 54.7% are beating top-line expectations. The composite growth rate for Q4, where wee combine the results for the 75 companies that haver reported with the 375 still to come, is for +7.5% growth on +1.9% revenue gains.
There is nothing new in the IBM sage as we have been seeing similar results fore more than a year now. Revenue in the hardware group dropped -27% from the year-earlier period in Q4. This followed a -17% drop in Q3 when management had pointed towards improved results in Q4 as a result of a new server launch. The company had hoped that management changes in the ‘growth markets unit’ that operates in emerging markets will result in a turnaround, but we didn’t see any evidence of that in Q4 results. In fact, Big Blue’s Chinese revenue dropped -23%, as purchases from state-owned enterprises stalled out.
Of course, not everything in the IBM report was bad. The company showed strong momentum in cloud-related offerings, backlog improved, and it was able to come ahead of consensus earnings expectations. But the earnings beat was less than convincing as it relied heavily on tax benefits and buybacks. Notthing new there either, as Big Blue has been 'managing' its earnings for a while with a boatload of buybacks.
United Technologies had a mixed report as well, beating on earnings, but coming short on revenues.Coach (COH) seems to be suffering from more than just tough competition from Michael Kors (KORS) as its North American same-store sales dropped more than double consensus estimates at -14%. The handbag maker missed on both the top- and bottom-lines.
In most respects, the results have seen thus far are not materially different from what we have been seeing in recent quarters. Revenue and earnings growth rates for these 75 companies are roughly in-line with what we saw from this same group of companies in recent quarters and the quality of guidance is largely along those lines as well. The beat ratios stood out for their weakness relative to recent quarters earlier on, but even they have started improving a bit over the last couple of days.
So, why the hand-wringing in the market about ‘mixed’ Q4 results? Because the market was hoping for something better, particularly since the domestic economic scene has been steadily improving, Europe has been stabilizing and the Chinese picture appeared to be less worrisome. But we are not seeing much evidence of this improving backdrop in company guidance, which means that estimates for 2014 Q1 and the coming quarters will keep coming down.
There is nothing new there, as we have been seeing estimates steadily coming down for more than a year now. But the Fed’s tight embrace helped investors overlook this sub-par earnings picture that pushed stocks into record territory. But now that the Fed is trying to loosen its QE grip a bit, they are starting to pay more attention to corporate fundamentals and unfortunately finding them wanting. Earnings fundamentals aren’t bad, they are just not consistent with a market sitting pretty in record territory.
Sheraz Mian
Director of Research
Read the analyst report on COH
Read the analyst report on IBM
Read the analyst report on UTX
Read the analyst report on KORS
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