Tags: latif | S&P | earnings | revenue

CNNMoney: Quarterly Profits Poor and Will Get Worse

Tuesday, 07 Aug 2012 11:31 AM

By Michael Kling

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Rising profits of U.S. companies have raised investors' hopes.

However, close examination unveils problems beneath the surface, according to CNNMoney.

The good news is that 64 percent of companies reporting quarterly earnings so far have beaten expectations, slightly higher than the 62 percent average during the past decade.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

Or the news might not be so great. Companies have gotten better at managing earnings expectations, Wasif Latif, vice president of equity investment at USAA Investments, tells CNNMoney.

The important numbers involve revenue, and those figures are disappointing, he says.

Overall revenue of Standard & Poor’s 500 Index companies is expected in increase only 2.2 percent for the second quarter. That's a big drop from the 6 percent revenue growth achieved in the first quarter. The measly increase surprised analysts who expected sales to increase about 5 percent, CNNMoney reports, citing S&P Capital IQ.

Earnings are expected to increase only 0.6 percent in the second quarter, the smallest increase since the third quarter of 2009. Only 41 percent of companies beat revenue estimates, much less than the 10-year average of 61 percent, CNNMoney notes.

Companies are typically blaming slower business in Europe. For instance, Apple CEO Tim Cook said slowing sales of iPhones in Europe were at least partly responsible for the company missing revenue expectations by more than $2 billion.

Cautious outlooks and lower expectations seem to be in fashion. Estimates, according to CNNMoney, have turned from profit growth of 0.7 percent for the third quarter to a 1.4 percent decline.

Yet, stock values continue to increase. The S&P 500 has a forward price-to-earnings ratio of 13.2 compared with 12.8 a month ago.

Rising prices combined with faltering revenues could lead to trouble.

"When you reduce earnings estimates, valuations suddenly are less attractive," Latif tells CNNMoney. "How much investors are willing to pay for those earnings is the ultimate litmus test for Wall Street."

But not all companies are reporting lower earnings. For instance, CVS Caremark, an integrated pharmacy company, reported a 16 percent revenue increase, according to MarketWatch. Chesapeake Energy, the natural gas producer, reported the best quarterly profit in its history and increased its 2012 production estimate.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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