Some positive surprises from big banks and other S&P 500 companies get the earnings season off to a better-than-expected start, but the data so far is too sparse to conclude that we’re seeing the beginning of a trend.
Alcoa’s (AA.N) third-quarter earnings announcement last week marked the official beginning of the earnings season for the period ended September 30. As previously discussed on AlphaNow, the rate at which companies have been beating analysts’ forecasts when reporting their third-quarter results has been disappointing so far, and currently stands at only 58%, still below average. Overall, the outlook remains gloomy, with low or subdued expectations translating into a forecast decline of 2.3% in profits for companies in the S&P 500 index. Nonetheless, there were some signs, in the shape of a handful of positive surprises, that that figure may rise in the coming days and weeks.
The first surprise came from Alcoa, which defied analysts’ forecasts that it would merely break even for the quarter and instead posted a profit (after one-time charges and expenses) of three cents per share. While this earnings beat looks impressive in absolute terms and on a percentage basis, it still marks an 80% decline in profits compared to the company’s year-ago profit of 15 cents a share. Alcoa also announced a decline in revenues of 9.1% for the period. That, says Chuck McLane, the company’s chief financial officer, was due to lower prices for its output and weaker demand in transportation, industrial and non-residential construction markets. Intriguingly, while many economists and investors have been anxious about the rapidly slowing growth rate in China, Alcoa expects to see demand for its products rise thanks to the recently announced stimulus package from the Chinese government.
Some companies doing business in China are continuing to see their profits rise as demand for their products increases despite a slower pace of economic growth. Yum! Brands (YUM.N) announced that its earnings for the quarter hit 99 cents a share, above the consensus forecast of 97 cents a share, as Chinese consumers continue to flock to its Taco Bell, KFC, and Pizza Hut outlets. “For us, the biggest tailwind we have is (that) the consuming class continues to grow, (and is) expected to double in the next 10 years,” Rick Carucci, the company’s president, told an earnings conference call. “Personal incomes, middle-class incomes, are rising, which is also a big plus.” The company’s revenue growth was slightly lower than expected, however.
Some of the country’s largest financial institutions also rewarded investors with some positive earnings surprises. Analysts had expected Wells Fargo Co. (WFC.N) to report earnings of 87 cents; it beat that by a penny. Revenues of $21.2 billion fell short of the consensus estimate, however, which had been $21.5 billion. Still, the bank reported earnings that were more than 20% higher than year-earlier profits, and John Stumpf, the bank’s CEO, said Wells Fargo continues to benefit as homeowners continue to refinance their mortgage loans while new homebuyers apply for loans amidst low interest rates. “Our credit card business is successfully generating new account growth, up 46%,” Stumpf added.
The trading losses that JPMorgan Chase (JPM.N) incurred as a result of the misadventures of the “London Whale” may have put a dent in its earnings and earned the bank a black eye among the public and regulators, but it didn’t stop the bank from delivering higher-than-expected earnings for the third quarter. Excluding a loss of 13 cents per share as a result of Debt Value Adjustments (DVA), JPM earned $1.53, 24% above the analyst consensus of $1.24. That gain came not only from a 6% increase in revenue but also a 9% cut in costs, primarily from the bank’s marketing budget. The bank’s investment banking division has struggled in prior quarters amidst a tough environment, but reported a 40% jump in earnings during the third quarter as clients rushed to take advantage of the ultra-low interest rates by issuing new debt, transactions on which JPMorgan was able to collect underwriting fees.
Of course, the earnings reports for the quarter published so far are too few and far between for analysts to develop any sense as to whether the positive surprises reported last weeks mark the beginning of a trend or simply represent some kind of anomaly. This week, some 80 companies in the S&P 500 are expected to report their results for the quarter, so by this time next week, investors will have a better idea of whether the dire forecasts from analysts appear justified or whether they have been unduly pessimistic.
