Monthly Archives: April 2012

Market Surveillance: Earnings, Management Commentary and the Economy

Mon, APR 30th, 2012

We are over 60 percent of the way through Q1 earnings season. So far, nearly 73 percent of S&P 500 companies have beat expectations, with an average beat close to 7 percent above the consensus. What’s more, year-over-year [Y/Y] earnings growth is running around 6 percent on some pretty tough comparisons [19 percent Y/Y in Q12011, 50 percent Y/Y in Q12010].

Sales trends are also encouraging. Nearly 70 percent of companies have exceeded top line expectations, a laudable improvement from the 53 percent of companies that beat in Q42011. Sales for the quarter are expected to grow about 5 percent.

Despite the challenges in Europe and the “slow-down” in emerging markets, earnings continue to grow as management teams navigate the headwinds with shrewd efficiency and the U.S. economy marches down its recovery path, albeit a relatively slow one.

Indeed, this is better than the lowered expectations of just a few weeks ago. Going into earnings, analysts had expected anemic 0.8 percent Y/Y earnings growth for S&P 500 companies with much fewer expected beats than we are getting. It’s also worth noting that in Q42011 about 66 percent of companies beat analysts’ expectations. This was in-line with the historical mean.

With that said, this blog will take it a step further and explore management commentary on various earnings calls as a proxy for the general economic climate. The below are random samples of what CEOs are seeing [commentary sourced from company conference calls and Business Insider].

US Steel CEO: “I do not see that ‘spring slowdown’ that everyone’s been talking about. We’ve looked at our second quarter and said things look pretty good for us at least. I think the way I’m seeing the world right now is there’s the potential for some degree of stability, which hasn’t visited us much since 2008.”

CBRE CEO: “You get some traction going in the spring of 2011 and people feel that things are a lot better and then there’s a shock to the system, the euro sovereign debt issue. And the suddenly the brakes are put on again. And then you get some traction again and then there’s China housing bubble issue. I think that we’re going to continue to see these kinds of things through the business until this recovery really gets it’s sea legs and it’s not there. It’s getting incrementally better every quarter.”

Regions Financial CEO: “We’re seeing very strong growth on the residential mortgage segment. Our refinance and new home purchase is running about 60-40. We are seeing even stronger pipelines in both consumer and business in the early part of the second quarter. Auto, indirect auto lending continues to be strong with us.”

Eaton Corp. CEO: The U.S. truck and construction markets are showing solid activity, and “Markets are growing faster than we had expected [vs. 3 months ago]. We are beginning to see attractive gains in our U.S. non-residential construction segments.”

UPS CEO: “I think global trade is going to stay strong. I don’t think you’re going to see, long term, these trade flows change that dramatically. I think some of that Asia impact clearly has been weaker consumer demand in Europe than in last year, consumer demand in the U.S. which is picking up now. So I think we’re fairly optimistic. You’re going to see later this year some of the Asia export numbers start picking up again.”

Cliffs Natural Resources CEO: “We’re seeing the same inflationary pressures on just about in every area of the business that you can imagine going through. We do get a little bit of an offset from the natural gas, which is very nice. But also have a lot of increased pressure on the electrical power pricing as well that goes with it. It kind of offsets things. The increased diesel fuel certainly isn’t helping things.”

Monster Worldwide CEO: “At the beginning of last quarter, many predicted steadily improving global economy. That view has now changed, and many fear a failure of the recovery and weakening business conditions, particularly in Europe. The optimism of last quarter was overstated, and we trust that the current pessimism is also overstated. However, it is difficult to predict how this uncertainty will be resolved, and therefore, we are positioning the company both offensively and defensively. Offensively, we are aggressively pursuing the objectives I’ve just discussed. Defensively, we continue to be extremely careful not to let spending get out in front of market conditions.”

Nielsen CEO:  “In terms of growth, I always describe it as probably Brazil is in the late innings of the game, and China is in the early innings, Africa is just getting started.”

PPR CEO: “Europeans are still buying up expensive discretionary goods.”

Caterpillar CEO: “Those two goals, actions and goals in my mind are extremely healthy. We were seeing a market that was too hot, boiling, in our industry and many others – real estate, housing prices and all the other things. China acted to curtail that and they did just that. I think they did a very good job in getting that done and then resetting five-year goals for GDP growth. Whatever ‘landing’ is occurring in China is a good thing.”

JetBlue CEO: “Despite an uncertain economic environment, demand trends remain strong throughout the quarter. Passenger unit revenues increased 8 percent year-over-year even with 12 percent more capacity as we, once again, outperformed the A4A domestic average. While the first quarter is typically weak from a seasonal perspective, we saw a significant strength in close-in bookings … the East Coast short-haul markets were, once again, among the best performing markets in our network.” *note – east coast short-haul is a good indicator of business activity*

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200