The Rising Influence of Rising Affluence

[DewDiligence]

U.S. Companies Strike Prophets

[A clever play on words by the WSJ!]

http://online.wsj.com/article/SB10001424052702303990604577368403618790154.html

›April 26, 2012, 5:53 p.m. ET
By JUSTIN LAHART

The first quarter hasn't provided the comeuppance for corporate results it was supposed to.

With companies topping analyst estimates by an unusually wide margin, profits look far healthier now than was expected earlier. For S&P 500 companies, first-quarter earnings now look set to rise 6.3% from a year earlier, according to Standard & Poor's Capital IQ. That is up from a projected increase of just 0.9% as expected at the end of last month.

Concern that companies might beat estimates, but then signal future weakness, also appears to have been misplaced. With around half of S&P 500 companies having reported, analysts have instead been nudging up estimates for the remainder of the year.

The first quarter's unanticipated vigor owes something to unexpectedly strong results from Apple : Take it out of the equation, and first-quarter earnings growth would be a slimmer 4.2%. Still, an unusually large number of companies have been topping estimates: 70% versus a 10-year average of 62%.

Another reason to cheer: The stronger earnings appear to have resulted not from more cost cutting but better sales.

Revenue growth for S&P 500 companies looks set to reach 6.2%, rather than the 5.5% analysts expected in March. That is a smaller shift than what's happened with earnings, but it's important to remember how sensitive earnings are to even slightly better sales.

All this suggests that a better outlook for the U.S. economy has so far trumped a worse one abroad [that’s only half right—many US companies are benefiting from strong growth in emerging markets]. The new refrain from companies has been that despite challenges in Europe and Asia, their U.S. business shone.

Weakness overseas hurt UPS, for example, which reported results Thursday that fell short of expectations. But it raised estimates for its package business at home. "We feel that the momentum in the domestic business continues unabated, so we feel good about the U.S. economy," said CFO Kurt Kuehn on the company's earnings call.

In and of itself, such optimism may bode well for the U.S. economy, since companies tend to hire and spend where things are getting better. It also suggests that companies conducting a large portion of their business within the U.S. are good investments—a lesson surely not lost on Italian automaker Fiat, which Thursday posted a first-quarter profit that would not have existed but for its majority stake in Chrysler Group.

Meanwhile, although earnings have beaten expectations from the end of March, the S&P 500 has fallen since then and now trades at 13.2 times expected 2012 earnings. One can't run a counterfactual analysis on where stocks would be if the European crisis hadn't flared up again, but better earnings plus lower prices mean a cheaper stock market.‹