Corporate Earnings Remain Solid 7/26/13

The second quarter earnings reporting season is well under way. The next two weeks in particular will feature a heavy dose of results and earnings guidance for the remainder of the year. Coming into the reporting season, we have been looking for year-over-year percentage earnings growth to be in the 4-5% range.  So far, through last Friday, with 21% of companies in the S&P 500 reporting, earnings are up 8.1% on a purely market cap weighted basis. Remember, the S&P 500 is a capitalization weighted index. On an “adjusted” basis, Standard and Poor’s is reporting that earnings so far are up 4.2%. These results are in line with our expectations. Of the companies that have reported, nearly 65% have come in ahead of “Street” consensus while 24% have fallen short of expectations.

A few of the earnings reports are:

Apple Inc. (AAPL) reported earnings Tuesday, posting $7.47 per share in earnings, which was greater than the $7.30 average analyst estimate.  The company’s top and bottom lines were helped by stronger than expected iPhone sales, showing investors that AAPL can post good earnings while in a product refresh cycle.  The next few quarters should be very interesting as Apple is expected to launch their newest iPhone and also a host of other upgrades.  Investors will continue to put pressure on Apple to launch a new innovative product that will expand the Apple product line. We remain skeptical that an iWatch will serve as this catalyst, however, Apple’s record amounts of cash should allow them to focus on new products and innovation well into the future.

Boeing (BA) surpassed analyst expectations, posting $1.41 per share in earnings, in large part due to the strong deliveries of its 787 Dreamliner.  However, investors in Boeing are still cautious due to the uncertainty/longevity of defense funding, which accounted for 38% of the company’s overall revenue.  In anticipation of Federal defense spending cuts, Boeing has been, and will continue, to make budget cuts.  Perhaps CEO Jim McNerny’s words say it best; “We’re not out of the woods at all.  We’re just entering the woods”.

PepsiCo (PEP) also beat analyst expectations, posting $1.31 per share.  While the beverage business showed declines in sales, PEP showed strong growth in both the food business in North America, as well as the entire business in Emerging Markets.

Not all earnings were positive surprises this week, however.  Caterpillar (CAT) posted revenues and profits lower than analyst expectations as mining equipment sales decreased more than expected.  This is attributed to the lower commodity demand in emerging markets.  The company also cut its full-year earnings forecast.  However, CEO Doug Oberhelman defended the company’s long-term outlook, stating that he is still very bullish on growth in China.

U.S Economy Continues to Push Forward

Economic news over the past two weeks has been somewhat positive.  Regional manufacturing news came in better than expected.  Both the Empire State (New York) and Philly Fed (Philadelphia) regional reports showed good positive movement to the upside in their latest readings. When looking at these regional reports, any reading above zero signifies expansion while anything below the zero line represents economic contraction. The Empire State report came in at 9.5 while the Philly Fed reading was 19.8. Over the course of the last year both of these reports had come in slightly below zero a time or two.  The NAHB (National Association of Home Builders) Housing Market Index also came in stronger than expected posting a 57 reading versus market expectations for a 51.

Mortgage applications fell off somewhat in the wake of the step up in interest rates caused by Federal Chairman Bernanke’s poorly timed comments.  He continues to try to “walk back” those comments and his most recent statements during a question and answer session following a speech on July 10th, Chairman Bernanke indicated that a highly accommodative monetary policy is what’s needed in the U.S. economy.  Then Chairman Bernanke said last Thursday that it was “way too early to make any judgment” about a potential decision to start cutting back on the central bank’s asset purchases in September.  He also said that the Fed had not slackened in its commitment to stimulate the economy — it will cut back only if the economy is making progress. He later “chastised” Congress, saying it was impeding economic growth.  He refused to talk about his own future, choosing instead to listen quietly as senator after senator treated the hearing like a goodbye party.  This may have been Mr. Bernanke’s final appearance before Congress as Fed chairman. It is widely expected that he will step down in January.

Overall the earnings and economic reports continue to show “modest” growth in the U.S. economy.  Our opinion is that one of the major missing ingredients for more robust economic growth is more clarity on government policy, regulation, taxes and spending cuts.  We have no idea if they will break their pattern of gridlock and get anything done by year end.  Despite this, the economy continues to grow and we think this trend will continue into 2014.  Eventually CEOs may decide to ignore the politicians and start investing in growth initiatives.   Consumers have continued to do their part with retail spending but we need corporate spending to increase significantly to provide the next leg of growth in our economy.  The game of politics seems to be “out of whack” right now and we hope they come to some sense of obligation to do the work needed for the country soon.  As stated above, Chairman Bernanke apparently agrees as he took his appearance before both the House and Senate last week to point out that Congressional gridlock is hurting the economic recovery.

Congrats to Matt…

Please join us in congratulating Matt Schaller on passing part II of the Chartered Financial Analyst (CFA) exam.  Just 43% of the testing group passed this test so this is a great achievement.  Matt has one more section to pass but he is well on his way to obtaining the CFA designation.