The quality of corporate earnings
Interview: Banc of America Capital Management.---Benson, Robert---Equity Strategist (slow)
>> we are now about 1/3 of the way through the third-quarter earnings season. this week we’ve seen a series of corporate executives discussing signs of an economic rebound, but their tone has been cautious.
>> we are outflow to the consumer, we see it. and we see that they are looking at making commitments in a much more positive way than they were doing six months back.
>> no question. the internet advertising market is picking up very nicely. the overall ad market is also strong, not as strong as internet advertising, but it is picking up.
>> we have inflows into mutual funds, particularly in the u.s. we do have growth in europe, our services are in demand there. so i think long term, i’m actually quite positive. but how that plays out right now, i still describe the economic situation and therefore the market situation as somewhat fragile.
>> we had record sales of laptop computer chips. we had record sales for servers and solid sales for computer chips that go into desktops. what that tends to tell you is that in europe and in the u.s. you see some business buying.
>> we look at the u.s. industry and european industry, we see some growth next year so we’re hopeful that the market will improve as the overall economy in both europe and the u.s. does.
>> joining us now from st. louis to take a closer look at the quality of corporate earnings is bob benson, senior market strategista banc of america capital management. welcome.
>> thank you.
>> as it stands now, we’ve heard from many companies and overall things have been looking pretty good. how do you see the earnings so far?
>> i agree. i think so far we’ve seen strong earnings. we haven’t seen too many misses and really we’re just about 30% of the s&p 500 constituents have reported thus far, we’re just about on the same pace we were for the strong earnings we saw in the second quarter.
>> that said, investors are looking at a market that didn’t do much of anything this week even with those numbers coming in and actually ended on a down note here. does that mean everything’s priced in that we’ve seen so far and investors need to hear more from the c.f.o.’s and c.e.o.’s to push the markets substantially higher?
>> i think investors need to look forward with their purchases and sales and i think they have been. what we really need to see, everyone expected third-quarter earnings to be very strong and we saw economic growth in the third quarter, very strong retail sales. what we need to see now are more signs that the momentum in earnings growth will continue into 2004 and the fourth quarter.
>> how important is it to you where the momentum comes from? if the earnings growth continues, if it’s from cuts and productivity or actual growth in sales and revenue?
>> it’s certainly better if we can get the moment num corporate earnings coming from growth and revenue. certainly the tax cutting that’s taken place over the last years los angeles helped firms in the―has helped firms in the bottom line dramatically. that will support corporate profitable moving forward. we’ve seen some gains in revenue but need to see further gains in revenue at this point.
>> we’ve seen a number of multinational companies getting an extra boost from the currency situation with the dollar weakness. that can’t continue forever, can it?
>> it will probably continue for a significant amount of time. you get two benefits from a falling dollar if you have foreign sales. the first is straight currency conversion when you return those revenues back to u.s. dollars when you report earnings. the second is that as the dollar weakens, in a global firm, you increase your competitive positioning relative to international competition and that tends to lag the decline in the dollar by about 12 months so we’re just now beginning to feel the effects from that.
>> we haven’t heard too many big disappointments so far with the earnings but more numbers coming out. you say the companies that disappoint will be severely punished by the markets. how come?
>> i think that quite a bit of earnings strength has been built into the stock prices, particularly in certain segments. investors are expecting very, very robust earnings from information technology companies as well as energy, given the oil prices and natural gas prices that we’ve had. and i think that investors are going to be very trigger happy should these companies disappoint them in their earnings announcements.
>> that all works into valuations here. are stocks ahead of earnings? what’s your outlook there?
>> i don’t think stocks are necessarily ahead of earnings at this point. currently, the market is trading at about 17.5 times the coming earnings for the next year. that’s a little bit stretched. it’s not very dramatically stretched. it’s not out of the realm of what i consider fair value. but going forward, we’re unlikely to see that multiple expand further but we’re more likely to see the price of stocks move not on the expansion of price-to-earnings multiple but rather than on the strength of the earnings.
>> so then you need to get a value of the market in terms of forward guidance that you may be getting and a lot of these companies of iffy on giving specifics.
>> i think you certainly do need to look at the forward guidance coming out of the companies during the earnings season. i don’t think this will be a short-term phenomenon where we see a light amount of guidance looking forward. i think that the regulations for full disclosure is impacting that as well as the personal risk to many corporate executives if they state something and it turns out not to be accurate.
>> bob benson, thank you very much, senior market strategist at banc of america capital management. the world’s number 2 consumer electronics maker is out with sales after the weekend. will sales help lift profit at sony? we’ll have a preview.
