More on Sales Lagging Profits

by Dollars and Sense

From Bloomberg:

Sales Fail to Keep Pace With Profits as Economy Stays Sluggish

By Peter J. Brennan and Steve Matthews

July 25 (Bloomberg) Sales growth lagged behind profits as companies in the Standard & Poors' 500 Index beat analysts' estimates this week, a signal that economic recovery may be slow.

Second-quarter revenue at Caterpillar Inc. and Freeport- McMoRan Copper & Gold Inc. tumbled more than 30 percent from a year earlier, though earnings topped the average of analysts'predictions. Amazon.com Inc.s profit skidded and sales missed estimates. United Parcel Service Inc.'s sales slid 17 percent. Microsoft Corp. saw annual sales drop for the first time in 23 years as a public company.

"The economy is coming back but it is not going to come roaring back," said Mark Zandi, chief economist at Moody's Economy.com. Companies "are going to be reluctant to add investment and jobs until they get better sales."

Revenue at 143 companies in the S&P 500 reporting this week, many of them bellwethers for the American economy, fell on average 10 percent from a year ago, according to Bloomberg data. Seventy managed to top the analysts' consensus for sales, while 107 did so for earnings per share.

The economy probably declined 1.5 percent in the three months ended June 30, marking the fourth straight drop and the longest such streak since quarterly records started in 1947, according to the median of 66 economists in a Bloomberg survey.

'Shrinking Your Way to Profitability'

"The real theme is the divergence between earnings and revenues," said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. "We know companies are cutting costs at a record pace, and that is helping earnings. But you can't keep on shrinking your way to profitability. Eventually, you do damage to your end users. You have to get revenues up to have a sustainable upturn."

Industrials led the sectors in earnings surprises, with 19 of 23 firms that reported during the week posting profit higher than analysts projected.

Caterpillar, the world's largest maker of bulldozers, reported 72 cents in per-share earnings excluding some costs, more than triple the average estimate of 22 cents. It also raised its full-year forecast, saying stimulus programs are starting to support global demand.

"We had a sharp decline and the recovery is likely to be gradual," said John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages about $542 billion. "Because of rising unemployment and rising household savings rate, the rebound will be anemic or weak."

Consumer Discretionary Surprises

Consumer discretionary companies such as Black & Decker Corp., Ford Motor Co. and Whirlpool Corp. also surprised analysts as 16 out of 18 reported higher than expected EPS.

The other sectors this week reporting a bigger increase in profit than analysts expected included health care, such as Boston Scientific Corp., on higher sales, and financials such as SLM Corp., also known as Sallie Mae.

"Companies did good jobs of managing costs," said Pat Becker Jr., chief investment officer at Portland, Oregon-based Becker Capital Management Inc., which manages $1.8 billion in assets. "You can only pull that string for so long. You eventually need revenue growth."

Sales declined in eight of the 10 S&P 500 sectors, led by a 65 percent fall at steelmakers Nucor Corp. and AK Steel Holding Corp.

UPS, the world's largest package-delivery company, reported a second-quarter drop of 17 percent in sales to $10.8 billion, its biggest quarterly decline since the company went public in 1999. Chief Financial Officer Kurt Kuehn said UPS doesn't "have any confidence" in a near-term pickup in demand.

'Double Dip'

Some economists fear a second economic contraction, what they call a "double dip."

"Expectations of corporate earnings will have to be downgraded again," Nouriel Roubini, the New York University economist who predicted the credit crisis, said in a July 23 research note. "Demand will be weak, most prices will be falling, and companies will therefore have little pricing power and their profit margins will remain squeezed. The expectation that in these conditions profits will rebound strongly is quite far-fetched."

Federal Reserve Chairman Ben S. Bernanke told Congress this week the economy is showing "tentative signs of stabilization," with consumer spending leveling out, though businesses have yet to increase investments.

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net
Last Updated: July 25, 2009 00:01 EDT

Labels: economic indicators, financial crisis, profits

 

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7/25/2009 04:07:00 PM