2nd Quarter Results show Earnings and Revenue Growth
Earnings season is about half way over as 228 of the S&P 500 companies have reported 2nd quarter 2014 results as of July 28. Since the latest economic recession occurred six years ago, many companies have cut costs and gone a long way to become leaner, more efficient operators. This has resulted in profit margins that are high from a historical standpoint and have allowed companies to continue to grow their earnings despite having relatively stable sales. This earnings growth has allowed companies to remain evenly valued from a historical standpoint as JP Morgan noted recently that U.S. Large Cap Stocks are actually 3.4% cheaper than historical averages with a current Price to Earnings (P/E) ratio of 15.6 as of the end of the second quarter vs. the 20 year average P/E ratio of 16.2. We, at Hennion & Walsh, are encouraged to see that this quarter, not only are earnings beating expectations but top line sales figures are also now starting to experience some growth. According to U.S. Global Investors, as of July 28, in addition to the 73% of companies that have reported earnings that beat expectations, 67% have also beaten revenue estimates thus far. As the chart below will depict, both beat rates are experiencing upward sloping trends.
Some of the more notable 2nd quarter earnings results that have been reported thus far, according to MarketWatch and Benzinga, include the following:
- Microsoft (GICS Sector: Information Technology) – fell short of analyst expectations as the company reported a fiscal fourth-quarter profit of $4.6 billion, or 55 cents a share, on revenue of $23.4 billion. During the year-ago period, the world’s largest software company earned $4.97 billion, or 59 cents a share, on $19.9 billion in sales. Analysts surveyed by FactSet had forecast Microsoft to earn 60 cents a share on $23 billion in revenue.
- IBM (GICS Sector: Information Technology) – exceeded analyst expectations as the company reported a second-quarter profit of $4.1 billion, or $4.12 a share, on revenue of $24.36 billion. During the year-ago period, IBM earned $3.23 billion, or $2.91 a share, on $24.92 billion in sales. IBM also reported operating profit of $4.32 a share, while analysts surveyed by FactSet had forecast IBM to earn $4.30 a share on $24.13 billion in revenue.
- Goldman Sachs (GICS Sector: Financials) – exceeded expectations as the company reported second-quarter earnings increased 9% to $2.04 billion, or $4.10 a share, compared with $1.93 billion, or $3.70 a share, in the same period the year before. Total revenue was up 6% to $9.13 billion compared to $8.61 billion in the year-ago quarter. Analysts expected EPS of $3.05 on revenue of $7.97 billion, according to FactSet.
- J.P Morgan (GICS Sector: Financials) –exceeded expectations as the company reported second-quarter profit of $5.99 billion, or $1.46 a share, down from $6.5 billion, or $1.60 a share in the same period a year ago. The results include legal expenses of $500 million, or 13 cents a share. Revenue slipped 2% from a year ago to $25.35 billion. Despite the year-over-year decreases, the results exceeded the average analyst estimates compiled by FactSet for earnings of $1.29 a share and revenue of $23.73 billion.
- Whirlpool (GICS Sector: Consumer Discretionary) – fell short of expectations as the company reported quarterly net earnings of $179 million, or $2.25 per share, down from $198 million, or $2.44 per share, in the year-ago quarter. Its ongoing business earnings came in at $2.62 per share, versus $2.37 per share. Its revenue dropped 1.4% to $4.68 billion from $4.75 billion. Excluding the impact of foreign currency and Brazilian tax credits, revenue rose around 1%. However, analysts were projecting ongoing business earnings of $2.91 per share on revenue of $4.84 billion.
- UPS (GICS Sector: Industrials) – missed expectations as the company reported quarterly earnings of $454 million, or $0.49 per share, last quarter, down from $1.07 billion, or $1.13 per share, in the year-ago period. Its adjusted earnings per share climbed to $1.21 versus $1.13. Its sales jumped 5.6% to $14.27 billion versus $13.51 billion. However, analysts were projecting a profit of $1.25 per share on sales of $14.13 billion.
- Reynolds American (GICS Sector: Consumer Staples)- fell short of expectation as the company reported a quarterly profit of $492 million, or $0.92 per share, versus a year-ago profit of $461 million, or $0.84 per share. Excluding certain items, its adjusted earnings surged to $0.89 per share from $0.84 per share. Its revenue rose 0.8% to $2.16 billion. However, analysts were expecting earnings of $0.87 per share on revenue of $2.19 billion.
- Merck (GICS Sector: Health Care) – beat expectations as the company posted a quarterly profit of $2 billion, or $0.68 per share, compared to $906 million, or $0.30 per share, in the year-ago period. Excluding non-recurring items, it earned $0.85 per share. Its total sales fell 1% to $10.93 billion. However, analysts were expecting earnings of $0.81 per share on revenue of $10.59 billion.
This combination of earnings and revenue growth should bode well for stocks. To this end, Jerry Webman, Chief Economist of Oppenheimer Funds, reminds those worried about P/E ratios that they should, “Keep an eye not just on the numerator (price), but on the denominator, as well. P/E ratios don’t have to keep climbing for equity market gains to continue. As long as earnings grow, prices can rise even if valuations don’t. And so far, earnings appear to be doing just that.”
As a result, investors may want to consider looking for the stocks of companies, or investment strategies that look for the stocks of companies, that have a recent history of growing their earnings (and revenues) and are still trading at a relatively reasonable price. This type of security selection process is often referred to as GARP (Growth at a Reasonable Price).
Disclosure: Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with the earnings growth theme discussed in this post.