Critical Earnings Season Kicks Off Today
Aluminum giant Alcoa will report its third-quarter earnings immediately following the closing bell today at 4 p.m., symbolically kicking off an earnings season that many are calling critical.
Here's one way to look at it: The first quarter (January to March) was the disaster quarter for most businesses -- one of the worst performance quarters since the Great Depression, with the economy shedding 700,000 jobs per week, the automakers teetering on liquidation, the credit markets still seized up and the stock markets in free fall. Accordingly, earnings were dreadful.
The second quarter (April to June) was the cost-cutting quarter. The stock market bottomed in early March and began its remarkable rally (up at least 30 percent during the quarter), consumer confidence ticked up, the automakers entered bankruptcy and businesses began to stabilize and cut costs, firing workers and slashing costs.
Accordingly, 75 percent of companies beat earnings estimates for the quarter. This was true for two reasons: Analysts set forecasts low and businesses mercilessly slashed costs. The key stat from the quarter: Only about 50 percent of companies beat revenue estimates for the quarter. So the second quarter saw good "bottom line" results, or net profits, but poor "top line" results, meaning there was little or no revenue growth because the economy was still in recession.
So what does that mean for the third quarter (July to September)? It means this was the getting-back-to-business quarter. Businesses have cut costs about as much as they can without significantly changing their operations. Third-quarter results will tell us whether businesses have started to get back to growing like they should.
Here's an example from the newspaper industry: Here at The Washington Post Co., the first quarter was terrible. The newspaper division -- mostly, The Post -- had an operating loss of $40.3 million, taking out depreciation. The paper had been cutting costs all year, but they really kicked in the second quarter, where the operating loss had been reduced (after removing depreciation) to $18.3 million.
Now comes The Post Co.'s third-quarter results, due out later this month. We'll see whether people want to buy ads in newspapers anymore. Expand that to the larger economy. We'll see whether people want to buy products and services anymore, now that businesses have survived the disaster of the first quarter and the Draconian cost-cutting of the second quarter.
A couple of things to look at in the third quarter: Stocks rose 15 percent from the beginning of the third quarter to the end, so that will affect earnings. But there is plenty of evidence to suggest (9.8 percent unemployment, anyone?) that this stock market rally is divorced from the underlying U.S. economy, which means the stock rally may not show up in corporate earnings.
As for Alcoa, it is expected to report a fourth consecutive quarterly loss, as the recession had reduced demand for its products in the construction and aerospace sectors. Forecasters expect Alcoa to lose 9 cents per share, a smaller loss than previous quarters, and then swing to profitability in the fourth quarter, which began Oct. 1.
-- Frank Ahrens
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October 7, 2009; 11:35 AM ET
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