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Earnings Find Right Path, But Aren't Out of Woods
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
A look at the most recent batch of earnings reports -- and the market's reaction to them -- shows that Wall Street may finally be putting its money where its mouth is when pontificating about a second-half recovery in capital spending and economic performance.
Year-over-year results are up about 10.2% for the third of S&P 500 companies that reported by Thursday's close, according to Thomson First Call.
"Most of that swing up is coming from capital-spending sensitive sectors," says Chuck Hill, director of research at Thomson First Call. "If they come through that means business spending is picking up. At 6.9% you're starting to get my attention, particularly because it's not just one industry or two."
So far this reporting period, the average that companies had come in above targets had inched down to 6.4%, but the drop wasn't substantial, and still well above the average of 2.7%. Mr. Hill said Wednesday that even 4% would be significant.
Investors are taking notice as well -- last week, buyers bid the economically sensitive Nasdaq composite up 4.9%, handily topping the more-defensive Dow industrials' 1.6% gain. For the year, the Nasdaq composite is up 6.7%, while the Dow industrials are flat. Meanwhile, the Nasdaq 100 index, or the 100 largest nonfinancial stocks on the Nasdaq, is up a relatively heady 10.1% for the year.
While volume was light in the holiday-shortened week, it's the first signal in a long time that investors are keen to get in on cyclical -- or economically sensitive -- plays ahead of a an acceleration in the recovery.
"There were concerns during the Iraq war of a potential double dip and I think those concerns are going away," says David Chalupnik, head of equities at U.S. Bancorp Asset Management, which manages about $118 billion.
Admittedly, expectations for the quarter were grim, so the pleasant surprises are something akin to finding out that your blind date doesn't resemble a baboon either in appearance or manner.
And, much of the quarter's gains came through cost-cutting and layoffs -- top-line growth in many cases was less impressive than the earnings surprise.
Though it's true that revenue didn't skyrocket, analysts say there is a silver lining there.
"On the tech side I would say that demand is a little bit better than expected -- in the past couple quarters they hit or beat earnings estimates, but fell short on revenue," Mr. Chalupnik said. "Now, we're seeing more tech companies hit the revenue line -- Microsoft, Intel and Texas Instruments all came in roughly in line if not a little bit better on revenue."
Microsoft revenue rose 8% to $7.84 billion, surpassing analysts' average estimate of $7.75 billion. Intel revenue hit $6.75 billion, down slightly from last year but above estimates for $6.7 billion. Texas Instruments saw revenue jump 20% to $2.19 billion, beating estimates of $2.14 billion. All the stocks ended up solidly for the week – Microsoft by 5.4%, Intel by 8.7%, and Texas Instruments by 19.5%.
Comparisons to last year's weak results weren't high hurdles to jump. And some tech giants -- which would be frontline recipients of an economic and capital-spending upswing -- are still reigning in forecasts for the second quarter or the year, most notably Microsoft.
And yet, analysts say companies are more inclined to give overly cautious guidance, fearing investors' wrath should they miss numbers in a difficult economic environment. Now that geopolitical concerns are significantly reduced, some think companies may be too pessimistic about upcoming quarters.
"Companies were holding off on large projects until they saw which way the war was going," says Pat Dorsey, director of stock analysis at Morningstar. "With it over, it's like this gigantic blob of uncertainty gone -- it's like the python swallowing the rat."
At the very least, Wall Street seems to agree that recent earnings reports -- besting hopes even amid a war that likely put a damper on spending -- indicate that we're securely out of the earnings and economic bottom.
Another cyclical area that is showing signs of awakening is the banking sector. Mr. Dorsey says he was pleased to see bad loans dropping off -- which bodes well not just for big financials like Citigroup and Bank of America, but also for the broader market since improvements indicate rumblings of economic acceleration.
"It's the best sign I've seen in a long time that we're starting to see a trough," he says.
The level of bad loans at FleetBoston Financial sank 14% from the fourth quarter of 2002. Citigroup said first-quarter provisions for loan losses declined $506 million from a year ago, and Bank of America said the level of new bad loans flowing into its books was the lowest in six quarters. Bank of America's net charge-offs, or money lost on uncollectable loans, was $833 million, down from $1.17 billion in the fourth quarter.
It's hard to keep up with the fastball pace of corporate earnings in the small space of time they all report. But analysts who take a bird's-eye view of the reports so far say they bode well for the economy -- and for the market.
Erik Gustafson, senior portfolio manager for Stein Roe & Farnham in Chicago, said investors beaten down by three years in a bear market were expecting more economic malaise, problems stemming from the war and more dismal earnings than they got.
"The possibility that the economy might be firming is now on everybody's minds -- and nobody wants to miss it," Mr. Gustafson says. "We're not out of the woods yet, but maybe we're starting to get on the right path."
Write to Erin Schulte at erin.schulte@wsj.com
Updated April 19, 2003 11:03 a.m.
KJC |
