Tags: Golub | S&P 500 | Extend | Profit-Beating | Streak | Margins

Golub: S&P 500 to Extend Profit-Beating Streak via Margins

Friday, 12 Nov 2010 09:01 AM

U.S. companies will extend their run of beating analysts’ earnings estimates as executives cut costs, UBS AG’s Jonathan Golub said.

Standard & Poor’s 500 Index companies outside the financial industry had an average profit margin of 11 percent last quarter, the highest since 2005, according to data compiled by Bloomberg on companies that have reported results. While JPMorgan Chase & Co. said last month that cheap debt and cost cutting will stop increasing earnings and Citigroup Inc.’s Tobias Levkovich said last week the slowdown in margin expansion will cause stocks to drop, Golub says companies will continue to manage costs, boosting profits.

Chief executive officers have cut expenses since the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008 and the worst year for the S&P 500 in seven decades. This earnings season would be the sixth straight period where more than 70 percent of companies beat estimates.

“Management’s doing such a fantastic job of being vigilant about costs, and companies are really surprising because analysts are underestimating how effectively they are being managed,” Golub said in an interview with Bloomberg News. “My read is that this thing is going to go much further because company management is looking at the economic backdrop and saying, ‘You know what? Let’s just keep things a little tighter for a little bit longer.’”

Boosting Profit Margins

More than 56 percent of the nonfinancial companies in the S&P 500 increased their profit margin last quarter from the previous three months, according to data excluding financial firms compiled by Bloomberg. The higher margins show executives have been able to boost earnings through cost cutting, while posting slower -- or even shrinking -- revenue growth amid less consumer demand. While shareholders benefit from higher profits, sales must expand to sustain earnings growth, according to New York-based Citigroup.

Yahoo! Inc.’s profit margin almost doubled last quarter from the three months ended June 30 as operating expenses fell. The Sunnyvale, California-based owner of the biggest U.S. Web e- mail program may have its best annual earnings growth since 2005, after beating the average analyst earnings estimate for the past three quarters, projections compiled by Bloomberg show.

As demand in emerging markets surges, Caterpillar Inc. of Peoria, Illinois, is aiming for a profit margin of 25 percent and is cutting the number of suppliers it uses to 6,000 from 9,000. The world’s largest maker of construction and mining equipment beat third-quarter income estimates by 12 percent, with earnings excluding some items this quarter forecast to rise to $1.25 a share from 41 cents a share in the same period the prior year, analyst projections compiled by Bloomberg show.

Jobless Rate

The U.S. unemployment rate has stayed near the highest since the early 1980s for more than a year, while the Federal Reserve has bought more than $1.7 trillion of securities to boost the world’s largest economy. Even though the recession ended in 2009, estimates for 2011 economic growth have fallen from a high of 3.1 percent in May to 2.4 percent last month, according to the median projection in a Bloomberg survey of 65 economists.

Levkovich says the next “major disappointment” for equities may come from pressured margins in 2011. JPMorgan said the rally’s sustainability will depend on expansion and the high unemployment rate will curb the potential for sales growth.

Profit Drivers

“These drivers of corporate profitability from cost cutting and declining funding costs should fade from 2011 and structural headwinds are likely to surface,” a group led by Jan Loeys, chief market strategist, wrote in an Oct. 29 note. “Companies will have to rely more on revenues to generate earnings surprises.”

The almost 72 percent of companies exceeding their average analyst estimates in the July-to-September period makes this the longest streak of more than 70 percent beating predictions in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 6.9 percent higher than analysts forecast, the data show.

“This pattern that we’ve seen of really big beats — it’s going to continue toward the middle of 2011,” Golub said. “The market really wants to see success on the revenue line more than on the cost-cutting line, but the market is happy to get the extra earnings.”

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U.S. companies will extend their run of beating analysts earnings estimates as executives cut costs, UBS AG s Jonathan Golub said.Standard Poor s 500 Index companies outside the financial industry had an average profit margin of 11 percent last quarter, the highest since...
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2010-01-12
Friday, 12 Nov 2010 09:01 AM
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