Wednesday, February 3, 2016

Stock Market: Earnings Season - Crushing Expectations?

(Drivebycuriosity) - It seems that the current earnings season was the most feared in the recent years. Media and analysts predicted "dismal earnings reports" and claimed that the profits of the leading US companies (S&P 500) dropped in Q4. "Woeful earnings threaten to intensify stock-market bloodbath", claimed MarketWatch (marketwatch). Really?

"With the U.S. earnings season about midway through, some 80 percent of companies in the S&P 500 have beat profit estimates", reports Bloomberg (bloomberg). In the recent years about 60% to 70% of company reports had beaten the profit expectations of the analysts, so it looks like that this earning season might reach a new record.

I show here a compilation of sectors and companies which surprised positively:

The Internet sector delivered strong numbers: Alphabet (the holding for Google) earned $8.67 vs analyst expectations of $8.09. Revenues rose $21.32 billion vs analyst expectations of $20.77 billion (and up 18% year-over-year). Facebook also crushed expectations for earning & revenue and reported its first profit above $1 billion. The online payment service PayPal beat earnings & revenue expectations as well. Amazon’s profit more than doubled to $482 million in the fourth quarter and rose per share to $1,00 from 45 cents, but missed the expectations ($1,56).

The rest of the technology sector started also encouragingly: The bellwethers Microsoft, Intel & IBM, the wireless technology specialist Qualcom and the storage manufacturer SanDisk beat earnings & revenue expectations and  Netflix reported a profit of 7 cents per share, more than triple of the analyst´s expectation (just 2 cents.) The cable & mobile provider Verizon joined the club of companies which beat earnings & revenue expectations. Apple reported slowing revenues and iPhone sales, but earnings rose to $3.28 (plus 7%) - 5 cents more than expected. The chip producer Texas Instruments also beat the profit expectations

The consumer companies sector showed that they belong to the winners of collapsing oil & other commodity prices because  consumers worldwide have more money to spend and costs for materials are falling. McDonald's beat earnings and revenue expectations, the same with Under Armour (sports fashion) and the toymaker Mattel.  Other consumer companies did well too: United Parcel Service (UPS), Procter & Gamble, Colgate-Palmolive, Starbucks, Whirlpool  (home appliances) the homebuilder D.R.Horton and the pharmacy firms Johnson & Johnson & Merck all earned more than expected.

The rest of the industrial sector also convinced. Profit & revenue at Boeing, the pill giant Pfizer, the biotech companies Biogen & Gilead Sciences all beat expectations. General Motors, Ford, Caterpillar (construction & mining machines), the chemical giants DuPont & Dow Chemical, the defense & aerospace company General Dynamics & the conglomerates 3M and  General Electric all earned more than expected as well.

All the big banks could disprove the gloomy predictions: JP Morgan, Citigroup,  Bank of America, Morgan Stanley, Goldman Sachs, Wells Fargo & PNC Financial, Bank of New York Mellon, Capital One.  They all beat the analysts`earnings expectations. JP Morgan declared that its fourth-quarter profits rose 9 percent from a year earlier, helped by a strong performance in its consumer banking division and lower legal expenses (  The banks managed the impacts of the steep drop in prices for oil and other commodities on their loan portfolios better than feared, helped by a solid consumer business.  Other financial companies also surprised positively: American Express beat expectations for earnings & revenue, the competitors MasterCard, Visa and the insurance holding companie Travelers delivered  earnings beats as well.

Even the battered commodities sector didn`t confirm the doom & gloom: The aluminum bellwether Alcoa delivered more profit than expected, even that the revenues dropped more than feared, thanks to the tumbling metal prices. Exxon Mobil`s profit dropped less than feared. Anadarko Petroleum and the oilfield-services-companies Schlumperger & Halliburton lost less than feared. U.S. Steel reported a loss of 23 cents a share, topping estimates for a loss of 85 cents a share (barrons).

                                                 The Clear Winners 

The earning season also showed the clear winner of the oil price collapse: The airlines. Delta Airlines boosted their earnings 51% from a year earlier, thanks to the falling costs of fuel (businessinsider). According to Business Insider the airline saved $5.1 billion fuel costs last year, thanks to the oil price crash. American Airlines also beat the earning expectations.

Many companies benefit from lower transport costs and from cheaper oil, steel, aluminum and other commodities which reduce their costs significantly. The pessimistic majority also underestimated how efficiency gains and technological progress enable companies to create rising earnings even in a sluggish economy. Companies are learning organisms. They are managed by humans who are getting better and better over time by continuously improving themselves and their companies.

I believe that the positive earnings surprises will continue in the coming days and may lift the sentiment and so the whole stock market.    

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