Led by financial services and information technology companies, S&P 500 companies are posting a string of positive surprises.
Last week marked the first big week of second-quarter earnings announcements and, thanks to a string of solid announcements by financial services and technology companies that dominated the results, the quarter’s results appear to be off to a strong start.
Of the 81 financial services companies in the S&P 500 index, 28 have now reported their results for the second quarter, and 69% of these reported results that came in ahead of analysts’ forecasts. That is better than the overall average “beat rate” as of the end of last week, which stood at 67.9%.
One of the most anticipated announcements last week came from Bank of America Corp. (BAC.N), which reported it earned 19 cents in the second quarter, compared to the consensus forecast of 14 cents a share. Bank of America is of particular interest to anyone tracking second-quarter corporate profits, since its massive loss in the year-ago period (tied to the settlement of a mortgage-backed securities lawsuit) created an easy comparison for the bank in this year’s second quarter, making the earnings growth rate look astonishingly high.
In spite of the bank’s better-than-expected results, CEO Brian Moynihan remained cautious when discussing the macroeconomic environment in which the bank is doing business. “There remains some uncertainty in the markets and in the minds of our customers and clients,” he said. “This largely revolves around the situations in Europe, the United States, around the longer-term fiscal issues that must be dealt with.” He said the bank’s strategy remains to run its business “consistent with that uncertainty.”
Morgan Stanley (MS.N) also faced easy comparisons, given that it reported a loss of 38 cents a share in the year-ago period. But the firm’s announcement of a 29-cent per share profit disappointed analysts, who collectively had been expecting earnings that were 33% higher; the bank’s revenue also fell short of expectations by 10%%, making it one of a handful of companies to disappoint analysts so far this quarter. James Gorman, Morgan Stanley’s CEO, identified many of the same concerns as Moynihan in the earnings conference call, noting that “tremendous political uncertainty in the second quarter was detrimental to the global capital markets, resulting in a very challenging environment” across the board for all Morgan Stanley’s business divisions. Sales and trading operations were hampered by what Gorman described as “weak client flows and difficult conditions”, as was Morgan Stanley’s core investment banking division. Nonetheless, investment banking revenues grew 4%, thanks in part to the bank’s leading role underwriting the Facebook IPO. (They didn’t offer any comments on the trading fiasco that Facebook’s first day of trading generated.)
The Information Technology sector also had a solid week, with 75% of the 12 companies that reported their results beating analysts’ earnings estimates. eBay Inc (EBAY.O) posted double-digit growth in both profits and revenues, beating analysts’ forecasts on both fronts. While many technology companies have struggled to generate revenue from new apps for mobile devices (users apparently find links to ads on small phone screens too difficult to “click”), eBay is one of the few that have done so successfully. “There is no question that an inflection point is occurring in retail,” CEO John Donahoe told analysts and investors on the conference call, emphasizing the importance of being able to provide options for consumers who prefer to use mobile devices. “Mobile is revolutionizing how people shop and pay, becoming the digital nexus of consumers’ lives. They want what they want, when they want it, anywhere, anytime.” Donahoe expects the volume of mobile transactions to double this year, noting that sellers are listing nearly two million items weekly on mobile devices, with a woman’s handbag being purchased on eBay Mobile every 30 seconds.
Yahoo! Inc (YHOO.O) made headlines by hiring a new CEO from rival Google (GOOG.O) this week, almost overshadowing its own better-than-expected earnings announcement. The company announced profits of 27 cents per share, beating the analyst consensus forecast of 22 cents a share. (As we reported last month, Yahoo was on track to outperform) Yahoo achieved this feat thanks to cost cutting however; the company reported that its revenues fell short of analysts’ forecasts. This earnings beat was largely the result of cost cutting, as the company missed its revenue estimate. “The majority of the reason that we were able to overachieve, ending at $228 million ongoing operating income instead of $200 million, is really” the fact that the company was able to cut costs more rapidly than even it had anticipated, Tim Morse, the company’s chief financial officer, told listeners on the conference call. “It’s a time of extraordinary change here and given what we’ve been through, it’s tough to get traction on the spending and investments that we’re trying to make.” Morse confessed that this wasn’t “a great reason to beat the number”, and added that “we have things that we need to invest in.”
As the earnings season progresses, investors will be keeping a keen eye not only on individual company results and the rate at which these are beating estimates, but also how analysts respond to the forward-looking statements by corporate executives during these conference calls. As portrayed in this week’s Chart of the Week on Alpha Now, there clearly is a close relationship between global economic trends and earnings expectations, with downward forecasts likely to be an indicator that management and analysts alike expect sluggish global economic growth environment to be reflected in corporate profitability levels.
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