While Bank of America’s costly settlement delivered a blow to forecast earnings growth rates for the fourth quarter, the rate at which the first companies to report are delivering positive surprises is off to a healthy start.
The fourth-quarter earnings season kicked off on a positive note last week, with companies beating estimates for both their earnings and revenue at a higher-than-average rate. The flurry of unexpectedly good news brought the ‘beat rate’ for earnings up to 65.4%, while that for revenues among S&P 500 companies hit 69.2% as of the end of the week. That good news, however, wasn’t enough to offset the impact of a big looming disappointment from Bank of America Corp. (BAC.N.) Analysts had expected the bank to report earnings of 18 cents a share; they cut their forecasts dramatically, with the consensus plunging to only 2 cents a share, after the bank announced an $11.6 billion settlement to its ongoing dispute with Fannie Mae over mortgage-backed securities, a legacy of the financial crisis. That was enough for the blended earnings growth estimate to fall from 2.8% to 1.9%, as shown below in Exhibit 1.
Bank of America is expected to report its fourth quarter results this week along other major financial institutions, including Morgan Stanley (MS.N), JPMorgan Chase & Company (JPM.N), and Goldman Sachs Group, Inc. (GS.N). The first of the large banks to report earnings, Wells Fargo & Company (WFC.N) started the sector off on a positive note last week when it announced profits rose 26% to hit 92 cents, handily exceeding the consensus forecast of 89 cents a share. Robust growth in commercial banking and mortgage financing helped boost Wells Fargo’s earnings; those in turn benefitted from low interest rates and an improving housing market.
Alcoa Inc. (AA.N) again ‘officially’ kicked off the earnings reporting season for the fourth quarter of 2012 last week by announcing better-than-expected revenues. The company reported a profit of 6 cents a share, as analysts had been anticipating, and a welcome shift from the loss the aluminum company announced in the same period a year earlier. That gain came in spite of a further decline in the price of aluminum, which tumbled 12% year over year. But Alcoa’s strength in the aerospace market helped the company return to profitability and announce revenues of $5.9 billion, 5% above the consensus forecast. In spite of this improved financial performance, Klaus Kleinfeld, Alcoa’s CEO, remained cautious during the quarterly conference call, expressing concern that the ongoing uncertainty surrounding the U.S. budget and defense spending in particular remains a source of concern.
American Express Company (AXP.N) was another company that announced early in this quarter’s earnings season. It released its results a week earlier than expected, and announced a better-than-expected profit of $1.09 a share for the period, beating the analysts’ estimate that it would earn $1.06 per share. In spite of that positive surprise, and the fact that American Express was able to show earnings growth over the prior year’s quarterly earnings, the company also announced a restructuring program that will cut costs further, one that includes the elimination of 5,400 jobs. (This came hard on the heels of reports that Morgan Stanley would trim 1,600 jobs.) Ken Chenault, the company’s CEO, explained that American Express plans to reduce “a number of activities that don’t directly drive revenues” as well as “eliminating or streamlining a number of functions across the company.” Chenault described the goal of the restructuring program as being to “make the company more nimble and more effective, and using our resources to drive growth even in a slow growth environment.”
This week will be the first in the ‘peak’ reporting period for fourth quarter earnings, with 38 of the 500 companies in the S&P 500 index scheduled to announce their results. With many of the big banks and prominent technology companies reporting, the week’s reports should provide further insight into some of the major themes that we expect will dominate this earnings season, including the issue of cost-cutting in the face of slow revenue growth (already highlighted by American Express) and the transition from PCs to tablets and smartphones.
