Earnings Season: So Far, so Good
The sky-high stock market, which rallied again on Tuesday, is getting support from an important source: corporate earnings.
At the midway point of the 1998 fourth-quarter profit reporting season, market watchers say they’re pleasantly surprised by the numbers so far, though hardly giddy.
“This is encouraging but not conclusive,” said Marshall Acuff, equity strategist at brokerage Salomon Smith Barney in New York.
Among the 248 companies in the blue-chip Standard & Poor’s 500 index that had reported results as of midday Tuesday, per-share fourth-quarter profits beat analysts’ consensus estimates by an average of 4.7%, said Charles Hill, research chief at earnings tracker First Call Corp. in Boston.
By contrast, for all companies reporting in the third quarter, earnings exceeded analysts’ estimates by an average of just 0.9%. And the norm over the last five years has been for companies to beat quarterly estimates by 2.5%, according to First Call.
Those data refer to “operating earnings,” which are results before any special one-time gains or losses.
Hill said last quarter’s results have been boosted by particularly strong earnings at several leading technology companies, most notably Microsoft Corp. Meanwhile, many companies in less robust sectors such as oil and chemicals remain to be heard from.
Historically, companies with good news tend to report early, which probably has skewed the overall results so far.
Even so, “we’ll probably do a little better than normal overall--I’d say 3% or 3.5% above estimates by the end of the season,” the First Call executive said. “But if we end up still at 4.7% when it’s all over, then I’d say, ‘Wow, this is really something.’ ”
In addition to beating analysts’ estimates, the average company is reporting results above year-earlier earnings. Fourth-quarter profits so far are running 6.3% ahead of 1997’s fourth quarter, on average.
But Hill said: “That number will probably come down too. We’ll end up at around 5% or slightly above,” compared with average quarterly earnings growth of 7% over the last five years.
Analysts say the strong U.S. economy in the fourth quarter buoyed earnings after a particularly weak showing in the third quarter, when turmoil overseas and a strong dollar hurt many companies.
Still, “this doesn’t represent a turnaround in earnings,” Hill said. “It’s partly the General Motors strike ending, partly the weaker dollar making for easier year-over-year comparisons.
“We’re still looking at below 5% growth year-over-year for the first and second quarters of ‘99,” he said--much weaker than the double-digit earnings gains many blue-chip companies reported in recent years.
While the fourth-quarter numbers overall look good thus far, Hill said the proportion of firms beating analysts’ estimates has only been about par. He said 54% of companies have posted positive surprises so far, compared with the five-year quarterly average of 55%.
More companies are matching analysts’ estimates this time around--27% so far, versus the five-year average of 19%--and only 19% are below estimates, versus the norm of 26%.
“The good news is fewer companies than usual have disappointed so far,” Hill said. Of course, that also could be because analysts were overly pessimistic in their estimates, in effect giving companies lower barriers to hurdle in the fourth quarter.
Along with tech, strong sectors so far include communications and “consumer cyclical” companies such as builders, home furnishing retailers and auto makers.
Year-over-year profit growth has averaged 24% among tech firms; 29% among communications companies, paced by long-distance carriers such as AT&T; and 23% among consumer cyclicals.
Not surprisingly, tech stocks have been the market leaders so far this year, as ebullient investors react to heady earnings gains.
Lagging sectors include “consumer staples,” with former profit leaders such as Coca-Cola Co. hurt by overseas troubles. “Coke was down about 27% year-over-year. Those are not the kind of numbers we usually see,” Hill said. The sector’s profit growth is averaging 1% so far.
Two key commodity industries are faring even worse. Energy profits so far are down 50% from 1997, while basic materials, including chemicals, are off 28%.
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Halftime Score for Profit Reports
Midway through the corporate earnings reporting season--with 248 companies in the Standard & Poor’s 500 index having reported fourth-quarter results as of midday Tuesday--the percentage of firms beating analysts’ consensus estimates is about on par with the five-year average. But fewer companies are lagging estimates, although that could change as the season wears on.
Per-Share Profits Versus Analysts’ Estimates
ABOVE
4th-qtr,’98, so far: 54%
Historical average: 55%
*
MATCHING
4th-qtr,’98, so far: 27%
Historical average: 19%
*
4th-qtr,’98, so far: 19%
Historical average: 26%
*
Source: First Call
