We have passed the halfway point of the first quarter earnings season, and the trend we have seen so far continues. While the majority of companies are reporting stronger-than-expected earnings, most are missing on revenue.
Last week was the heaviest week of earnings reports for S&P 500 companies, with 164 companies reporting first-quarter results. Of these companies, 67% beat their respective earnings estimates, while only 42.6% posted positive revenue surprises, as seen in Exhibits 1 and 2, respectively, below. These results largely mirror the trend we have seen to this point in the earnings season. The majority of companies continue to report stronger than expected earnings, while most are missing on revenue.
Amazon.com, Inc. (AMZN.O) surprised to the upside with earnings per share of 18 cents, beating the consensus estimate of 8 cents. At the same time, revenue of $16.07B missed the estimate by 0.5%. Looking ahead, Amazon warned that its revenue for the second quarter would be below analyst estimates. Citing factors such as macroeconomic uncertainty, a stronger dollar, and uncertain consumer consumption, the midpoint of Amazon’s guidance is a healthy 19.5%, but still less than the 23.9% that analysts covering the company had anticipated.
With earnings of $1.04, United Parcel Service Inc (UPS.N) topped its $1.01 estimate and grew earnings 4.0% over last year’s $1.00 EPS result. Revenues, on the other hand, were slightly below estimates, while growing 2.3% over year-ago sales. International shipping continues to face challenges as the global economy struggles to grow. Scott Davis, the company’s CEO, gave his view of the economy during the earnings call. He explained, “Although the U.S. economy is poised for growth, it is being restrained somewhat by the tax increases and sequestration implemented during the first quarter. This will be a drag on 2013 GDP expansion with current expectations for about 2% growth. However, we expect the small package market to grow faster than the economy. Around the globe, the eurozone remains sluggish, though UPS volume continues to show steady growth, again outperforming the economy.”
Harley-Davidson Inc (HOG.N) had a strong quarter, growing earnings 34% and revenues 11%. However, analysts were expecting more on the top line, as Harley-Davidson had a -3.3% revenue surprise. Cold weather prevented customers from purchasing motorcycles during the quarter, and a weak economy also made customers think twice about buying a high-end bike. Like many companies, HOG has responded to a slow economy by trying to maximize efficiency. The company’s restructuring efforts paid off this quarter, as it improved its net profit margin from 13.1% a year ago to 15.8%.
O’Reilly Automotive Inc (ORLY.O) reported EPS of $1.35, which was 19.3% higher than the year-before figure of $1.14. The automotive parts retailer was also affected by poor weather conditions, as many of its customers work on their cars outdoors in their driveways. This contributed to the revenue figure of $1.59B, below the estimate of $1.61B. Company CEO, Greg Henslee, described the dual effects of the slow economy on O’Reilly’s business during the earnings call: “We are encouraged to see unemployment slowly moving in the right direction, but the current rate is still high, which reduces commuter miles driven and contributes to a high degree of economic uncertainty. When we look at the long-range future of our business, we remain very optimistic about the fundamentals of our industry, as the U.S. vehicle fleet of 241 million cars and light trucks on the road at an average age of 10.8 years continues to age and go through more routine maintenance cycles and consumers continue to realize the value of investing in repairs of higher-mileage vehicles.”
Now that the halfway point of the first quarter earnings season has passed, it is clear that the divergence between earnings and revenue estimates is not going away. With a higher-than-average percentage of companies beating earnings estimates and one of the lowest rates on record of companies beating on revenue, it appears that companies have successfully cut their way to profit growth more than was expected. Analysts project positive earnings growth for the next four quarters, but without top-line growth it will be a tall order to grow earnings as the available areas from which to cut continue to disappear.
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