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Saturday, April 21, 2012

Why Investors Aren't Impressed With Profits





When it comes to happy surprises on Wall Street, it's hard to get better than this.
U.S. companies made more money in the first three months this year than almost anyone expected. As earnings reports roll in, they're beating the estimates of stock analysts at a rate not seen in more than a decade.

Yet stocks have languished. The Standard & Poor's 500 index has fallen about 2 percent in April. So why aren't investors impressed? For starters, earnings season has just begun. The real test is the next two weeks, when more than 300 companies in the S&P 500 report. Apple, the most valuable company in the world, reports Tuesday.

Topping estimates is no great feat. Publicly traded companies do it almost every quarter. They tell analysts to expect a number the companies know will be low. Then they can enjoy a "pop" in their stock price when — surprise! — they clear the hurdle.
And this quarter, it's not much of a hurdle. Just a month ago, companies got analysts to expect first-quarter earnings to grow so little you'd need an electron microscope to spot the rise — just 0.5 percent.
"People aren't as excited as they would be if the estimates hadn't been taken down," says Uri Landesman, president of Platinum Partners, a hedge fund. Of every 10 companies that have reported first-quarter results, eight have posted higher profits than Wall Street analysts had estimated, according to S&P Capital IQ, a financial research firm.Still, some beats are impressive. Yum Brands Inc., owner of Pizza Hut and Taco Bell, turned a profit of 96 cents per share, trouncing the 73 cents expected by Wall Street.

That's the highest ratio of "beats" since 2001. In the fourth quarter of last year, the figure was less than six in 10. Thanks to surprising results in the past two weeks, S&P 500 companies are on track now for earnings growth of 4.3 percent over the first quarter of 2011. They're growing across industries, too. Analysts had expected seven of the 10 industry groups in the S&P to post lower profits than a year ago. They now think only three will — telecom companies, utilities and materials makers.
Here's a look at what the higher profits portend.Maybe, but only if investors believe future numbers are heading higher, too. For all the upbeat reports, investors tend to buy and sell stocks based less on what companies earned in the past than on what they're likely to earn in the future. And the outlook is OK, not great.
After a 11 percent increase last year, companies in the S&P 500 are expected to grow earnings 7 percent in 2012, according to S&P Capital IQ. Just six months ago, Wall Street was expecting a 12 percent jump for this year.
The good news is that lower expectations don't always push stocks down. In the first three months this year, analysts slashed estimates for first-quarter profits, and the stock market had its best winter since 1998.
There even have been periods when earnings barely budged and stocks soared. In the five years through 1986, the S&P nearly doubled while earnings slipped 2 percent. Sometimes stocks rise because investors get more comfortable with the idea of buying stocks generally, and they're willing to pay more for each dollar of profit — even if those profits are expected to grow more slowly.

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