Investment Contrarians

Why You Shouldn’t Expect Much from Corporate America

By for Investment Contrarians |

Corporate AmericaAlcoa, Inc. (NYSE/AA) will be the first Dow stock to report in the third-quarter earnings season, as it kicks off with its results on October 9. The company is one of the world’s top aluminum makers. The stock is also a good indicator for the global economy, as the metal is used in many industrial applications, including aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial.

In the second-quarter earnings season, Alcoa beat slightly on earnings but revenues are an issue, as will likely be the situation for many U.S. companies. For Alcoa, revenues are estimated to fall 12.7% in the third-quarter earnings season followed by a 5.0% decline in the fourth-quarter earnings season.

Overall revenue growth is estimated to be flat, down from 1.9% growth at the start of the third quarter, according to FactSet. This is not what you would expect if the economy was healthy. And while there is some hope and optimism for the third-quarter earnings season, I expect disappointment across the board.

Based on the current estimates, earnings for the S&P 500 are estimated to fall 2.6% in the third quarter, which would end the 11 straight months of earnings growth, according to FactSet (www.FactSet.com). So far for the third quarter, 82 S&P 500 companies have issued negative earnings-per-share (EPS) guidance versus only 21 companies reporting positive guidance.

The top performing earnings growth predicted for the third-quarter earnings season is in the financials sector at 10.4%, according to FactSet.

The two weakest areas of earnings growth in the third-quarter earnings season are predicted to be the energy and materials market sectors.

As in the past quarters, the key question, in my view, is whether companies are growing their revenues to drive earnings or is earnings growth being generated by cost cuts. This is critical and could give us a good indication on how well corporate America is actually doing. Based on the soft GDP growth, I’m not expecting any major upside surprises.

The reality is that many companies cut costs during hard times, and they 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 raw materials essential to economic renewal, such as copper, iron, lumber, and concrete.

As I have said, revenues going forward will be extremely important, especially organic growth rates. We want to see revenues grow to drive earnings instead of cutting costs. Without revenues growing, it is difficult to imagine a healthy economy, and my concern is that this could hamper growth.

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