Is Revenue and Earnings Growth Dead?

By George Leong for Investment Contrarians | Aug 14, 2012

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As we near the end of the second-quarter earnings season, we are seeing soft revenue growth or declines across the board, despite the fact that about 64% of the 400 S&P 500 companies that have reported have beaten earnings per share (EPS) estimates as of August 7.

First of all, the number of companies beating on the earnings side would likely be much lower if not for the fact EPS estimates were cut by Wall Street. Earnings have grown a muted 0.6% during the second-quarter earnings season.

Take a look at the revenue side. Only about 41.0% of these S&P 500 companies have beaten the revenue estimate during the second-quarter earnings season, well below the 10-year average of 61.0%. The second-quarter earnings season revenue results are the weakest since the first-quarter earnings season of 2009 with growth at a mere 2.2%.

This is a red flag and clearly suggests the stalling of the global economies and its impact on companies.

What I noticed is not only the poor revenue showing, but also the numerous big-cap companies showing muted demand for technology spending.

The results from some of the leading technology companies during the earnings season indicate a worrisome situation.

Apple Inc. (NASDAQ/AAPL), Wall Street’s technology darling, disappointed after coming in at the short end. The fumble was partly blamed on consumers delaying their purchases in anticipation of the debut of the “iPhone 5” in September. Strong products from rivals are also presenting some headaches for Apple, including the “Galaxy 3” smartphone by Samsung Electronics Co. Ltd. (OTCBB/SSNLF).

Intel Corporation (NASDAQ/INTC) came up short on the revenue end. Paul Otellini, Intel’s president and CEO, said, “As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment.” (Source: Intel press release, July 17, 2012; http://www.intc.com/releasedetail.cfm?ReleaseID=692584.) In other words, businesses and consumers are not spending to the degree the company was hoping for. This statement doesn’t seem to indicate that global economies are on the mend.

Intel made a downward revision in its 2013 guidance, blaming the sluggish global economies. Revenue growth will come in at a sluggish three percent to five percent year-over-year in 2012, down from the previous high single-digit estimate.

Yahoo! Inc. (NASDAQ/YHOO) was also short on the revenue side, but managed to beat on EPS. Yahoo is a mess and needs to be fixed by newly minted Marissa A. Mayer, a former top engineer from Google Inc. (NASDAQ/GOOG).

Other large-cap companies falling short on the revenue end include QUALCOMM Incorporated (NASDAQ/QCOM), Google, Johnson & Johnson (NYSE/JNJ), and General Electric Company (NYSE/GE), to name only a few of numerous companies.

Bearish economist Nouriel Roubini (aka Dr. Doom) is calling for “below trend growth” to come for years.

Even China’s companies are hurting. Earnings at Chinese state-owned companies declined 11.6% in first- and second-quarter earnings seasons, according to the Ministry of Finance. The situation could worsen as the demand for Chinese goods falls.

And as we move ahead to the third-quarter earnings season, S&P 500 earnings are estimated to fall 0.1% year-over-year, compared to the 3.1% forecast as of July 1, according to Thomson Reuters. This would be the first earnings decline since the third-quarter earnings season of 2009.

Tags: big-cap companies, earnings season