This is as good as the recovery gets
Investors have been waiting almost a year for an economic recovery put some oomph back in stock prices. The optimists have their eyes set on the second half of 2002; the pessimists are thinking about 2003. I think the recovery already is here -- it just doesn't look anything like what we were expecting.
By Jim Jubak
The economic recovery is here. I can see it in the numbers that companies are reporting this quarter. And that’s disappointing news for investors with lofty expectations.
The growth isn’t anywhere near strong enough to jumpstart the kind of broad-based, bull-market rally that so many investors are hoping for.
You can see what the recovery looks like by studying the numbers that American Express (AXP, news, msgs) just reported.
Total revenue grew by 3% in the first quarter of 2002. That’s nothing special, as growth rates go, but it marks the first increase in revenue at the company since the first quarter of last year.
That’s in the same ballpark as the 4% to 6% revenue growth that Procter & Gamble (PG, news, msgs) is projecting or the 5% growth that Nokia (NOK, news, msgs) is predicting.
And it’s similar to the 2% revenue growth that Intel (INTC, news, msgs) reported this quarter and the 6% that it’s projecting for the June period.
Not exactly the good old days
So what were you expecting, 1999? In the fourth quarter of that year -- the last quarter before the bubble burst -- the economy grew 8% and corporate earnings jumped 20%.
This recovery doesn’t look like it’s going to put up numbers like that -- especially once you look past the bounce off the bottom that some companies will get in the next quarter or two.
Look at numbers from American Express again -- only this time, look at earnings and not revenue. Compared to 2001, projected earnings growth in 2002 looks spectacular. Earnings per share are set to rebound to $2 from 93 cents -- a gain of 115%.
But that gain is so huge only because 2001 was such a lousy year for American Express. Projected earnings for 2002 are still 6 cents below the $2.06 a share that the company earned in 2000.
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In 2003, Wall Street expects earnings growth at American Express to drop back to just 13%.
That’s remarkably similar to the projections for Nokia. At Nokia, the earnings gain for 2002 looks like a very modest 12% and then 15% growth in 2003.
Solid? Certainly. But a huge disappointment to any investor who remembers the 60% earnings growth Nokia turned in during 1998. Or even the 45% of 1999.
Unspectacular sales growth means tepid stock gains
If this quarter’s numbers do, indeed, add up to a real but relatively modest recovery, investors better learn to throw out expectations for investment gains based on memories of 1998 and 1999.
These relatively modest growth rates translate into relatively modest stock prices.
Consider the $23-a-share target price that one Wall Street firm has put on Nokia, for example. To get to that price, the analyst uses projected earnings per share for 2003 that are 5% above the consensus -- and calculates that investors will pay 25 times earnings for a stock growing earnings at 15% a year.
The result is a respectable 30% potential return in a year. But it’s a disappointment to any investor who remembers that the stock traded for $23 as recently as early March -- and that at $23 a share, the stock price would still be way, way below the 52-week high of $35.50 and even farther below the March 2000 high of $57.50.
In other words, if Nokia performs as this analyst projects, then investors who buy near recent prices can expect to make solid money. But they can’t expect to see a quick return to the bull-market prices of 2000.
Cost cutting as growth engine
There’s one other take-home lesson in this quarter’s numbers. In a recovery this modest, the only way to produce double-digit earnings growth is to combine 5% top-line revenue growth with some bottom-line cost cutting.
For example, Nokia’s projected 12% earnings growth is built on continued cost cutting that will drive margins in the wireless-phone division to near 20%.
And American Express reduced operating expenses this quarter by almost $500 million from last quarter’s level. That was more than the total $320 million increase in net income for the current quarter.
In a weak recovery, a dollar in savings is just as precious as a dollar in revenue.
Editor's Note: A new Jubak’s Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBC’s Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Intel and Nokia. He does not own short positions in any stock mentioned in this column.
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