Corporate earnings are also referred to as “company earnings” and “corporate profits:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.
One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
When it comes to the recent pullback in the market, many people naturally wonder if this is the time to start accumulating certain companies, especially technology stocks. The answer, of course, is far more complicated. Obviously, each individual must assess their goals and risk profile before considering any investment.
My goal is to be on the lookout for companies that can continue to grow corporate earnings over a very long period of time. One area that has interested me for a long time because of this ability to grow corporate earnings is in technology stocks.
Recently, many technology stocks have not benefited from the surprisingly strong rally in the overall market. A major reason for this is that many investors are focusing on dividend yield rather than corporate earnings growth. Additionally, many technology stocks are not seeing exceptional corporate earnings growth, as the global economy is still somewhat weak.
Not all technology stocks are the same. There are vast differences between technology stocks, and an investor needs to dig deep when evaluating which firms can grow corporate earnings over a full decade.
One company that I have liked over the past few years has been eBay Inc. (NASDAQ/EBAY). While many people believe eBay is still primarily a place to sell your knick-knacks, they’re wrong. During the latest quarter, the company reported total revenues were up 14% year-over-year. (Source: “Q1 2013 financial highlights,” eBay Inc. web site, April 17, 2013.)
eBay is transitioning into a real powerhouse through its “Marketplace,” which is where retailers sell fixed-price online goods. The company is now looking at adding same-day delivery services for these goods, … Read More
One way to look for an investment opportunity, finding companies that will grow their corporate earnings over the long term, is to look for situations in which there is an unmet demand.
Recently, the Federal Deposit Insurance Corporation (FDIC) conducted a survey; the results were a shock to me. Approximately one in 12 U.S. households currently has no bank account—that’s roughly 17 million adults. A further 20% of U.S. households are currently under-banked, meaning they have a bank account, but they also use check cashing services and other alternatives. (Source: “Margin Calls: Life on the edges of America’s financial mainstream,” The Economist February 16, 2013.)
This is an investment opportunity for firms willing and able to service this market. Companies should be able to increase their corporate earnings by widening their clientele, since the traditional market is becoming quite saturated.
The initial thought would be to look at payday lending firms as an investment opportunity in this market. While it is true that the annual interest rate can exceed 400%, providing ample corporate earnings, the long-term investment opportunity might not be there for payday lenders. The reason is that lawmakers are enacting tougher restrictions and standards, with the possibility of the federal government beginning to regulate this industry.
Many might believe banks can provide this service, creating an investment opportunity for higher corporate earnings. However, the truth is that due to new regulations and rules on interest rate increases and fees for credit cards, banks are actually not generating corporate earnings from the lower-end market sector.
According to consulting agency Oliver Wyman, following the financial crisis and new rules from … Read More
It’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.
According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)
We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.
According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)
With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.
One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More