By Caroline Valetkevitch
NEW YORK, May 4 (Reuters) – U.S. companies are seeing plenty
of green this quarter, but they are raising red flags about the
future.
Earnings growth is running at nearly 8 percent for the first
quarter, better than expected, but are issuing negative outlooks
for the second quarter by a ratio of 3.3 to 1, the worst ratio
since late 2008, according to Thomson Reuters data.
That ratio this week briefly rose to 3.9 to 1, the worst in
more than a decade.
It is a sign that executives are worried about the U.S. and
global economies, and helps explain why stocks have failed to
react vigorously when companies come out with results ahead of
what Wall Street expects.
“Companies are looking out there and saying we don’t know
what’s going to happen in Europe. The U.S. economy is growing at
a modest pace, but there’s a lot of uncertainty around it. So…
they’re behaving as if they’re nervous,” said Jonathan Golub,
chief equities strategist for UBS in New York.
The gulf between expectations and results has been a common
theme in the U.S. corporate profit recovery, and has usually led
to a higher-than-average percentage of companies beating
expectations.
In past quarters, this was welcomed by investors, but it is
coming as less of a surprise given the habitual caution ahead of
results and the lackluster commentary from companies.
S&P; 500 first-quarter earnings growth is currently 7.8
percent, up sharply from 3.2 percent just before the reporting
period began. However, second-quarter growth estimates have
declined in that time, and third-quarter forecasts are just
marginally higher.
Companies have good reason to be cautious. The U.S. recovery
has been sluggish. After fourth-quarter growth of 3 percent at
an annual rate, first-quarter growth has slowed to 2.2 percent,
and the second quarter also suggests sluggish growth.
Dow component Procter & Gamble cited sluggish U.S.
growth in cutting estimates for its fiscal year ending in June,
with Chief Executive Bob McDonald telling analysts: “What’s
happening is, obviously, you’ve got a higher fuel price, you’ve
got other macroeconomic headwinds like housing and other
things.”
Overseas growth is lackluster. China is slowing, and euro
zone surveys suggest contraction in both the manufacturing and
services sector.
Low visibility across the global economy has kept outlooks
from rising with earnings growth, Barclays analysts wrote in a
research note.
This has companies holding back on spending not just in
hiring, but in areas such as advertising and research and
development, Golub said. Private U.S. employers added just
130,000 jobs in April, the Labor Department said Friday, short
of expectations.
DISCONNECT POINTS TO WORRY AHEAD
The disconnect between expectations and results is apparent
in the current earnings period. With results in from more than
400 of the S&P; 500 components, 68 percent have beaten profit
expectations, above the 62 percent long-term average, Thomson
Reuters data showed.
Investors have caught on to the fact that low expectations
mean more earnings beats, and as such, have not been rewarding
companies with big stock gains.
Shares of companies beating estimates outperformed the S&P;
500 by an average of 65 basis points in the week after earnings,
Goldman Sachs analysts said in a research report. That compares
with an average of 250 basis points last quarter, they said.
Yet the pattern of a high percentage of companies beating
estimates could be repeated in the second quarter.
Second-quarter earnings forecasts have barely budged, so a large
percentage of companies could vault a low bar again, Golub said.
S&P; second-quarter earnings growth is seen at 8.9 percent
versus an April 1 forecast of 9.2 percent, while third-quarter
growth is seen at 5.6 percent versus April’s 5.3 percent.
The S&P; sector with the worst negative-to-positive guidance
ratio so far is health care, at 8 to 1, according to
Thomson Reuters data.
St. Jude Medical Inc Chief Executive Dan Starks,
following the company’s better-than-expected first quarter
results and a weak forecast for the second quarter, told
analysts: “We really think there is value to erring on the side
of being conservative, if we are going to err at all.”
In the tech sector, which has given more guidance than any
other sector, Juniper Networks, Qualcomm,
Lexmark International and even Apple all gave
lower-than-expected outlooks.
On the Juniper’s conference call following results, CEO
Kevin Johnson said “there are still significant headwinds in
Europe… we’ve seen service providers be very cautious in their
capital expenditures.”
Other sectors, like the financials, have offered almost no
guidance on future earnings.
Analysts at Keefe, Bruyette and Woods raised questions about
the quality of earnings for the banks. Companies in that sector
have seen fewer upward revisions, with KBW analysts saying
earnings have been boosted by unsustainable factors, including
mortgage banking and trading income.
A thin silver lining is this: While more companies are
guiding lower, the rate at which they are cutting estimates is
easing, said Key Private Bank Director of Research Nick Raich,
suggesting “second quarter estimates are probably too low.”
The question is whether fourth-quarter estimates are still
too high and will come down to reflect the current worries.
Fourth-quarter growth is forecast at 15.9 percent, Thomson
Reuters data showed.
“Where we’re going to hit a roadblock is, expectations start
to get high in the end of 2012 and the beginning of 2013,” Raich
said.
(Reporting By Caroline Valetkevitch; Additional reporting by
Edward Krudy; Editing by Tim Dobbyn)
