Cullen Roche
submits:
Earnings are coming in far better than expected this quarter.
Thus far, 83% of companies have topped analyst's expectations.
That's an astounding figure compared to the historical average of
62%.
But as I mentioned
the other day with Apple's earnings release
it's more important to look under the hood than it is to take these
figures at face value. After all, "better than expected" could
simply reflect the low level of the underlying estimates and not
the strength of the actual data.
(Image Source: CNN)
The best way to gauge the organic growth in corporate earnings
is to look at the top line growth. Revenues per share have climbed
10.9% from the trough in December 2009 and remain 12.75% from their
peak - a recovery, but a recovery with a lot of work to do before
we can say that corporate America has fully recovered. This
quarter's 7% year over year growth is a bit stronger than last
quarter's 6% year on year figure. This is a positive trend. But a
closer look at the revenues tells a story of two very different
economies.
In my intense focus on the domestic balance sheet recession I
have not focused enough on the strength abroad - particularly in
Asia. There is no doubt that revenues have rebounded across
corporate America, but the domestic recovery in revenues is hardly
robust at this point. This has been apparent in all earnings thus
far where we have have seen consistent reports of strong
international revenues and weaker domestic revenues. Yesterday's
average daily package volume from [[UPS]] highlighted this. While
they showed 3.5% year over year growth domestically, their
international growth was 13.7%. This is very important. While we
see deflationary trends in the developed world we continue to see
inflationary trends in the emerging world (
click to enlarge
).
This early glimpse at earnings shows that results are coming in
substantially better than expected and revenues are surprising to
the upside nicely. Although most of the revenue recovery is
occurring abroad it's a positive sign for corporate profits any way
you cut it. If this trend is to continue it could be positive for
the labor market, however, because cost cuts have contributed so
substantially to the bottom line (33% year on year EPS growth thus
far this quarter) there is no great urgency for firms to hire.
Companies can sit on their fat margins and churn out nice profits
until they are certain that revenues have stabilized and there is a
need for labor expansion.
This is going to be crucial when considering the future strength
of the economy in the USA. This margin expansion has created
flexibility that is good for corporations and bad for the millions
who remain unemployed as it likely means the climb out of the job's
trench will be a long road. This situation was beautifully
summarized by Caterpillar (
CAT
) yesterday in their earnings
release
:
I am pleased that we have put so many people back to work this
year, and with continued global economic growth, we will add
people in 2011 but remain keenly focused on cost control. While
we are expecting positive economic growth in the United States,
the recovery is weaker than we've seen historically, particularly
given the depth of the 2009 recession.
In other words, they're cautiously looking to hire, but have no
great urgency as they remain concerned about the outlook for the
domestic economy and margins remain the number one priority. All of
this points to signs of a continuing weak domestic economy and
earnings growth that is being supported by Asian growth and margin
expansion.
See also
Gauging Market Reaction to Possible Fed
Intervention Scenarios
on seekingalpha.com