Not Selling, Not Earning [WSJ]
AHEAD OF THE TAPE By JESSE EISINGER
A battery of Wall Street reports have come out in the past several days debunking the notion that sales and earnings were notably strong in the second quarter.
Sales and earnings in the second quarter were, in fact, weak. They were inflated by the falling dollar, a boost that has nothing to do with management skill or increased demand. Companies continued to cost-cut their way to profits, a process that runs its course.
Wall Street is still playing the game of lowering the bar so that companies may glide over it easily. Dresdner's James Montier estimates that companies only topped earnings estimates for the second quarter by 2% compared with the forecasts made at the end of the first quarter, rather than the 6% we have been hearing about. Worse, he reminds us that investors are looking at pro forma or operating earnings, which overstated true income, or net income, by 60% this quarter. Investors looking at pro forma numbers are "committing financial idolatry," he writes.
Strategists from HSBC last week found that in the second quarter, sales for the S&P 500 excluding financials were up 8%. That appears strong, but is down from 13% in the first quarter.
Excluding energy companies because of high energy prices, and financials because falling interest rates led to boom times, the figures are starker. By that measure, sales were up 5% in the second quarter, compared with 8% in the first.
And then there is the weak dollar. Adjusting for the impact is tricky. HSBC calculates that the S&P excluding energy and financials had merely 1% sales growth, compared with 5% in the first quarter, dollar-adjusted. Sanford C. Bernstein's Vadim Zlotnikov, for his part, estimates sales growth for the S&P industrials was 4.2% adjusted for the weak dollar, compared with 8.2% in the previous quarter.
Tech was anemic. Software-company sales were about flat, semiconductor sales were down 3% and hardware was down 7% from a year earlier, says HSBC.
Does the quality of second-quarter earnings matter for the outlook? Certainly. Stocks have priced in big second-half earnings gains. For that, companies need to see demand pick up as they increase capital investment while hoping that the dollar doesn't strengthen along with the economy.
Updated August 14, 2003 |
