Earnings season focus shifts to revenue, capex We

Earnings season focus shifts to revenue, capex
Week ahead includes Apple and Facebook earnings , plus a Fed meeting
SAN FRANCISCO (MarketWatch) — Expect a heightened focus on revenue and corporate capital expenditure spending as earnings season reaches its midpoint this week.

Last week, the Dow Jones Industrial Average (DJI JIA) finished up 1.1%, the S&P 500 Index (SNC:SPX) gained 0.9% to finish at a new record close of 1,759.77, and the Nasdaq Composite Index (NASDAQ:COMP) advanced 0.7% after a peak earnings week.

On the surface, results from the biggest U.S. companies appear relatively strong, and that’s helped support stock gains.

With nearly half the S&P 500 and more than two-thirds of the Dow industrials having already reported quarterly results, the current earnings season is looking to be the best of the year in terms of how companies are beating expectations. And S&P 500 earnings are on their way to setting a new record high.

“What’s occurring is that U.S. corporations are benefitting from being the best house in a bad neighborhood,” said Brian Belski, chief investment strategist at BMO Capital Markets. Much of that has to do with corporate America stripping away costs in a challenging global revenue environment, Belski said.

A wave of earnings beats last week significantly bumped up the percent of companies topping forecasts. After this past week, 75% of S&P 500 companies have topped the earnings consensus this season, compared with the four-year average of 73%, according to John Butters, senior earnings analyst at FactSet. Prior to last week’s reports, the earnings beat rate had been running at 69%.

This will be a “Dow-a-day” week of quarterly results with Merck & Co. (NYSE:MRK) on Monday, Pfizer Inc. (NYSE FE) on Tuesday, Visa Inc. (NYSE:V) on Wednesday, Exxon Mobil Corp. (NYSE:XOM) on Thursday, and Chevron Corp. (NYSE:CVX) on Friday.

Plus, more than 120 companies on the S&P 500 report next week with notable releases from Apple Inc. (NASDAQ:AAPL) and Biogen Idec Inc. (NASDAQ:BIIB) on Monday; Gilead Sciences Inc. (NASDAQ:GILD) and Allergan Inc. (NYSE:AGN) on Tuesday; Starbucks Corp. (NASDAQ:SBUX) , General Motors Co. (NYSE:GM) , and Comcast Corp. (NASDAQ:CMCSA) on Wednesday; along with MasterCard Inc. (NYSE:MA) and ConocoPhillips (NYSE:COP) on Thursday.

And Nasdaq stock Facebook Inc. (NASDAQ:FB) reports Wednesday.

Easier to beat

Some strategists, however, are less than impressed with earnings. Earnings beats have become a less significant metric because the results compare with lowered expectations. In late June, analysts on average forecast earnings-per-share growth for the third quarter would be around 6% year-over-year. By the time earnings season started, they had trimmed that growth outlook to less than 1%. The beats don’t “seem to be all that clean,” said Tobias Levkovich, chief U.S. strategist at Citi Research, in a recent note.

“Moreover, a good number [of companies] have made or topped forecasts on lower than expected tax rates or one-time items, suggesting that results were not necessarily comprised of high quality beats,” Levkovich noted. “Accordingly, it is challenging to argue that the reporting season has been all that good when some detailed insight is applied.”

Also, corporations giving outlooks for the fourth quarter continue to be negative, which places pressure on analysts to lower their estimates. About 86% of fourth-quarter earnings outlooks (49 out of 57 companies on the S&P 500) have been negative, meaning the forecast falls below the current Wall Street consensus, according to Butters. Over the past five years, on average, about 63% of companies giving a quarterly earnings outlook provided one that’s below the consensus.

With much of corporate America still conservative about costs, a metric that’s useful to look out for is a company’s mention of capital expenditure spending, Belski said. A prime example of that was Microsoft Corp. (NASDAQ:MSFT) earnings last week. Not only did Microsoft top earnings estimates but revenue was $730 million higher than the Wall Street consensus due to a big boost in spending from businesses.

Given excess volatility in Europe and emerging markets, expect to see more of an acceleration of capital expenditure spending going into 2014, Belski said.

Revenue may be a cleaner indicator during earnings season because fewer companies on average are managing to top consensus estimates. Revenue beats for the S&P 500 are actually running below the four-year average of 59% this season with only 52% of companies reporting top-line results above the Wall Street consensus, according to Butters.

One group that’s beating the average so far this season is a list of 20 companies, excluding financial and utilities, that Goldman Sachs estimated would be top contributors to third-quarter revenue growth on the S&P 500. So far, nine out of 11 companies on that list, or 82%, have beaten the revenue consensus by an average 1.6%, according to FactSet data. The big upside surprises go to Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) (8.7% above consensus with $6.17 billion in revenue) and Microsoft (4.1% above consensus with $18.53 billion in revenue.)

The other companies on the list that beat revenue estimates were Ford Motor Co. (NYSE:F) , Google Inc. (NASDAQ:GOOG) , Amazon.com Inc. (NASDAQ:AMZN) , WellPoint Inc. (NYSE:WLP) , McKesson Corp. (NYSE:MCK) , Boeing Co. (NYSE:BA) , and Verizon Communications Inc. (NYSE:VZ) . UnitedHealth Group Inc. (NYSE:UNH) and United Technologies Corp. (NYSE:UTX) missed the revenue consensus.

Companies on the Goldman list reporting this week include LyondellBasell Industries NV (NYSE:LYB) , Aetna Inc. (NYSE:AET) , AmerisourceBergen Corp. (NYSE:ABC) , Chevron, Marathon Petroleum Corp. (NYSE:MPC) , and Eaton Corp. (NYSE:ETN) . http://www.marketwatch.com/story/earnings-sea...2013-10-28