How the Economy Will Impact Corporate America
There has been so much focus on the fiscal cliff that I feel traders are ignoring the problems of slowing growth in corporate America.
The fourth-quarter earnings season begins tomorrow with Alcoa Inc. (NYSE/AA), the first DOW stock to report in this earnings season. Alcoa is one of the world’s top aluminum makers; the stock is also a good indicator for the global economy, as aluminum is used in many industrial applications, including aircraft, automobile, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.
In the third-quarter earnings season, Alcoa beat on Thomson Financial consensus earnings, but its revenues are an issue, which will likely be the situation with many U.S. companies. For Alcoa, revenues are estimated to fall 6.3% in the fourth-quarter earnings season, followed by a 1.3% rise in the 2013 first-quarter earnings season, according to Thomson Financial.
For the fourth-quarter earnings season, the overall revenue growth is estimated to be three percent, according to FactSet (Source: “Earnings Insight,” FactSet, December 14, 2012, last accessed January 4, 2013.) This is simply not what you would expect if the economy was healthy. And while there is some hope and optimism for the fourth-quarter earnings season, I expect disappointment.
Based on the current estimates, earnings for the S&P 500 are estimated to rise three percent in the fourth quarter, according to FactSet. So far for the fourth quarter, 79 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, versus only 30 companies reporting positive guidance.
The top-performing earnings growth predicted for the fourth-quarter earnings season is in the financial sector, according to FactSet.
The two weakest areas of earnings growth in the fourth-quarter earnings season are predicted to be the industrial and information technology sectors.
As in the past quarters, the key is companies growing their revenues to drive earnings or earnings growth being generated by cost cuts, according to my stock analysis. This is critical and could give us a good indication on how well corporate America is actually doing. Based on the soft gross domestic product (GDP) growth, I’m not expecting any major upside surprises.
The reality is that many companies cut costs during hard times, and these companies should be in a better condition now. If the economy was truly healthy, we would see earnings growth driven by revenues. In addition, what the company says about the future is important.
The key is to monitor the companies that are global in nature, especially those that produce the raw materials that are essential to economic renewal, such as copper, energy, iron, forestry, and concrete.
As I have said, revenues going forward, especially organic growth, will be critical. We want to see growing revenues, instead of cost cuts, driving earnings. Without revenues growing, it is difficult to imagine a healthy economy, and I am concerned that this could hamper growth.