Investment Contrarians

Accounting Usually Creates a Decent Earnings Season—But Not This Year

By for Investment Contrarians |

Accounting Usually Creates a Decent Earnings SeasonWhen I read the newswires each morning, I scour for trading opportunities; but the one thing that I have been noticing lately is the lack of moderate revenue growth among the reporting companies. I’m not saying that I would like to see revenues growing at 30%–40% or more, but even growth in the low double digits would suffice at this point, given the global stalling.

The market is all giddy about the first-quarter earnings season early on, but I really don’t understand why investors are that happy. I’m clearly not seeing the same things.

As of Monday, about 104 S&P 500 companies have reported during the earnings season, and their results have been in line with the previous quarters, in which about 67.3% beat earnings-per-share (EPS) estimates, according to Thomson Financial.

Again, the first-quarter earnings are encouraging—but not exactly something to get euphoric about.

The reality is that while two-thirds of the S&P 500 companies are beating estimates during the earnings season, the revenues side is another story—a story that I feel is being ignored by investors.

Companies are beating the earnings estimates assigned by Wall Street. In some cases, the earnings estimates are lower than previous estimates; in this regard, the companies are, in some cases, actually only meeting or beating reduced estimates during this earnings season.

Moreover, we are also seeing legitimate earnings manipulation by companies that want to please Wall Street and investors. This is not illegal and can often return business intelligence (BI) for shareholders.

By pursuing aggressive cost cutting and containment, companies can reduce the cost side and present a much better earnings picture, even if revenues were lackluster. This is what Wall Street and investors want to see. So, never mind the revenues side.

Xerox Corporation (NYSE/XRX) marginally beat on earnings in its first-quarter earnings season, but its revenue growth of a mere three percent was on the light side and failed to meet Thomson Financial estimates.

McDonalds Corporation (NYSE/MCD) saw its revenue expand by one percent, while earnings were in line. Same-store sales fell one percent worldwide—don’t tell me everything is OK in this earnings season.

Then there’s also International Business Machines Corporation (NYSE/IBM), whose revenues fell five percent in the first-quarter earnings season, with the company looking for answers to its hardware business.

General Electric Company (NYSE/GE) also fell short on its revenues in its first-quarter earnings season—down sequentially and year-over-year.

Caterpillar Inc. (NYSE/CAT) reported weak results, with revenues declining 17% year-over-year in the first quarter. Worse yet, the company also made a downward revision in its 2013 revenues guidance.

“What’s happening in our business and in the economy overall is a mixed picture. Conditions in the world economy seem relatively stable, and we continue to expect slow growth in 2013,” said Caterpillar’s CEO Doug Oberhelman in the company’s press release. (Source: “Caterpillar Reports First-Quarter Results, Revises Outlook and Announces Resumption of Stock Repurchase,” Yahoo! Finance web site, April 22, 2013.)

This last comment sums it up, but unfortunately, the stock market may be ignoring the red flags. My advice: take some money off the table!

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