S&P 500 Companies Beating on Earnings, Missing on Revenues

At the end of two weeks of non-stop second quarter earnings reports, S&P Capital IQ expects a decline of -0.71% year-over-year in the S&P 500 Index for the quarter, a figure it calls “historically low.” On the earnings front so far this quarter, 68% of the 119 companies on the Index have beat earnings estimates, but only 42% have been able to beat revenue estimates.

S&P notes three reasons for the disparity:

1. Lowered earnings expectations – analysts lower the bar to the point where companies are easily able to jump over it.
2. Cost cutting – Index companies are “running very lean at this point,” but are still finding ways to cut costs.
3. Creative accounting – “companies seem to be implementing clever but unsustainable accounting methods” by reporting “extraordinarily large costs” for one-time exclusions from non-GAAP adjusted earnings.

According to S&P Capital IQ, companies that have reported so far are beating earnings by 6.4%, more than double the 10-year average of 3%. The average revenue miss is -0.4%.

Companies are expecting to report 4.1% revenue growth in the quarter, a figure Capital IQ calls “respectable” compared with the 10-year average of 6%. Seven of ten sectors are projecting revenue growth, but the possible downside here is that margins will come under pressure.

One thing S&P Capital IQ did not mention was currency translation rates, which hit McDonald’s Corp. (NYSE: MCD) hard today, hurt Abbot Laboratories (NYSE: ABT) and the Coca-Cola Co. (NYSE: KO) last week. Coke, for example, expects a negative impact from currency translation rates in the high single digits for 2012.

Paul Ausick