Corporate Outlooks Hint At More Pain Ahead

I realize that this WSJ article is a month old but there are some valid points to revisit here based on some of our previous discussions surrounding corporate earnings outlooks.  About a month ago I featured Nick Raich, director of research at Key Private Bank [February 17, 2012 Nick Raich on Earnings Guidance] who does extensive work on using earnings guidance in his economic forecasts.  


It's no secret that companies under promise and over dealer when it comes to earnings.  Missing earnings is the easiest way to wipe out large amounts of market cap especially when it comes to momentum names.  Companies have been operating at a high efficiency with record setting productivity but cost cutting can only last so long especially in the face of stiff headwinds such as higher input and energy costs.  


Case in point FedEx this past week handily beat Wall Street estimates which should have led the stock up but instead it faltered when it announced lower guidance.  "The fourth quarter is still very good, but what we're seeing at the moment ... is we just don't have as strong an economy as we would have hoped it would be a year ago," Chief Financial Officer Alan Graf told analysts on a conference call.  "The economic environment and the elasticity that we're seeing on our premium services due to high fuel costs are dampening momentum a bit."  The company said more expensive fuel was prompting customers to choose to ship goods by truck rather than air to save money.


Via the WSJ here

• Fifty-eight companies have released estimates for first-quarter earnings that fall below analyst consensus, compared with 23 that beat Wall Street. That’s the largest ratio of negative to positive announcements since the first quarter of 2009, when the S&P 500 was on its way to bottoming out below 700 in early March. 
• “We’re seeing more negative guidance than usual,” said Greg Harrison, earnings analyst with Thomson Reuters. Estimated profits for 2012 have steadily fallen since October. The average S&P 500 company currently expects to add 8.3% in profits for the year. Just over a month ago, that estimate was at 10%. 
• Pepsi, for one, cut its outlook for fiscal year 2012 by more than 7% – from $4.40 a share to $4.08 a share – in part because the costs of the raw materials, including energy, used to make its products will rise. The company said raw material inflation will take $1.5 billion from its bottom line in an investor meeting after its Feb. 9 earnings announcement. 
• Many companies are also hitting a wall on just how much of their expenses they can cut after recessionary belt-tightening. “Margins have come off their peak,” said Bill Stone, chief investment strategist for PNC’s asset management group. Margins, the percentage of revenue that translates into profit, rose steadily from 2008 until recently, when the average rose to 9%. But this quarter, the average is expected to fall to 8.5%, meaning companies are having a tougher time eking out higher profits out of steady levels of revenue.