Posted by: Howard Silverblatt on July 9, 2010
Q2 Reporting Starts Monday: Look at Q/Q and Sales
Earnings season starts Monday, and the S&P 500 Q2 2010 earnings are expected to increase 42% over Q2 2009 - great. And the person who had a mid-level job two years ago, then lost it, and took a lower level job a year ago is also doing much better than last year. Right direction, but no where back to where we were. As reporting starts, headlines of double-digit gains will be many, but beating out last year is no great feat. While I believe that year-over-year comparisons traditionally (during normal economic periods) portrays a clearer picture of change, the current recovery requires more emphasis on the quarter-to-quarter change and the underlying momentum. The Q2 S&P 500 EPS increase of 42% to $19.68 from the $13.81 in Q2 2010 is quite different than the 1.5% gain over the Q1 2010 EPS of $19.38. I’m not being a Bear, I’m just trying to cut through the expected spin and put where we are in this recovery, and where the market prices are together.
The sales ‘growth’ story is the same. I am estimating that sales growth for the second quarter will continue to show positive, but slow, growth. Second quarter sales, excluding Financials, are expected to post a 12.2% gain over the second quarter of 2009. However, the gain over that poor performance of 2009 is not impressive, especially when measured against the expected 3.6% gain over the first quarter. In this light, the second quarter growth is slower than would have been expected for a recovery period.
While Q/Q growth is expected to be slow, margins for both Operating and As Reported are expected to stay relatively high due mostly to prior cost cuttings which have reduced cost per unit. The sustained earnings should give some support to the market, but without an upswing in the underlying economy, prolonged earnings growth cannot be sustained.
The bottom line is that earnings may hold up, but sales growth is slow and companies aren’t going to invest their record cash holdings until it improves. Once sales improve companies will have to replenish inventories, increase production, maybe invest in plant and equipment, and hopefully hire workers (full, part or just extending hours). Then we will have growth, as well as lower EPS since higher costs will reduce margins, but people will be working, and then spending and paying taxes.
However, we are not going to get higher sales until people and companies can figure out what is happening. Uncertainty is everywhere: taxes, health care, jobs, stimulus, cut-backs,… How do you invest if you don’t know where you are going? With all due respect to Simon & Garfunkel’s Seven O’clock News (44 years ago), Uncertainty is the greatest single weapon working against the U.S..
See file for detailsSP500_EPS_DIV.XLS