Tuesday, November 18, 2008

Just How Bad Are Corporate Profits?

Today's earnings report from Hewlett-Packard raises the question posed in this blog postings' title. To help shed some light on the subject, consider the corporate results produced thus far re 3Q08.

Compiled each week from data published in the Wall Street Journal (and produced for subscribers in each weekly report along with more than a dozen other charts and tables), the accompanying table* shows that when you exclude Financials & Energy, the earnings results are less than great but nowhere near as dire as the headlines and sound bites would led investors to believe. Moreover, the quarter over quarter results ex Financials show a net gain.

That said, several items warrant comment:

* Autos (Consumer Goods) had the largest swing from horrendous (-$42.6B) to just plain bad (-$2.5B)
* Broadcasting and Airlines hit the Consumer Services sector with negative swings of $17.5B and $3.5B, respectively
* Conventional Electricity (Utilities) were hit hard due to higher energy costs to the tune of $-5.3B

Going Forward

Needless to say, investing is a forward looking game. Guidance has ranged from cautious to the ever dangerous "challenging". Despite this fact, however, most bottom up analyst projections remain in what could only be classified as the enthusiastic category, as evidenced by 2009 S&P 500 operating earnings estimated in $90 range.

While obviously overly optimistic, the bottom up boys and girls' forecast may not be too terribly off the mark as lower energy costs and a more robust global growth scenario turn out to be two of the surprise events of the new year. Then there is the very serious prospect of write-ups in Financials as assets held get mark to market upward should any return to normalcy in debt and credit related assets pricing occur.

Investment Strategy Implications

Doomsday scenarios abound. The headlines are awful. And while the credit markets show some progress, the TED spread remains elevated as the improvement in LIBOR is offset by the deflation/depression fear driven levels in the 3 month US Treasury rate.

Thankfully, the equity markets are now past the November 15th notification date for hedge fund redemptions, which should alleviate some of the forced liquidations that have roiled stocks over the past six weeks. However, unmet hedge fund redemptions linger as something of an overhang remains (gradual liquidations replaced hurried forced liquidations) as does tax related selling by individual investors.

Lots of conflicting factors at play. Then again, what would you expect during the bottoming process of one of the worst financial and economic episodes in history?

*click image to enlarge


Derek from Cloud9 Sports said...

Vinny, I can't make direct sense of the following and was hoping you could expand on it for clarity. Thanks.

"...as evidenced by 2009 S&P 500 operating earnings estimated in $90 range. "

Vinny Catalano, CFA said...


Thank you for the question.

The data comes from S&P industry analysts. As of last Thursday, their forecast for operating earnings (which are somewhat different from standard earnings) is $90 for the S&P 500.

To put things in perspective, operating earnings for this year, 2008, is around $68.

Bottom line, they are looking for a large increase over the next twelve months driven by significant improvements in Financials.