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Earnings Season Winds Down


Earnings reports have poured in over the past two weeks, that have generally met or exceeded earnings estimates. Of the 334 S&P 500 companies that have reported third quarter earnings, 210, or almost 63% have beaten analysts' estimates, while almost 21% failed to meet analysts' estimates. The year-over-year growth rate, however, has slipped for the second consecutive week. Earning for the S&P 500 are running 13.5% ahead of last year's results, down from 14.5% last week.

Luxury retailers and high-end consumer goods have fared better than discount stores and lower-priced merchandise items. This trend appears to have continued in the third quarter. Coach, the luxury handbag designer and retailer, reported that earnings increased 60% while sales grow 33%. Growth at comparable stores increased 15% in the US and Japanese locations increased by "mid-single digits."

The surge in imported goods has stressed the transportation sector over the past year. Burlington Northern has capitalized on the increased traffic along with the troubles at Union Pacific. The railroad company reported a 17% increase in sales. Intermodal shipments increased 15%, driven by a 28% increase in consumer goods from Asia. The company did say that its corn and other grain shipments have not increased even as farmers are producing a record crop this year. The company said that farmers are holding out for better prices and are storing crops instead of selling them. It expects this until the end of the year.

Yellow Roadway, the largest trucking company in the country, reported that third quarter revenue jumped 16%. At its Yellow Transportation unit, tonnage shipped increased almost 5% and said that tonnage per day is ahead of 2000. The recently acquired Roadway division reported that tonnage shipped was up 1.4% from last year. The company continued by saying these trends continued into October, which are 3% ahead of last October. Pricing at both units increased 4.5% and the company thinks that the "pricing environment will continue to be very strong."

Results from Automatic Data confirmed that the labor market expanded during the third quarter. The number of workers on its payroll processing system increased by 1.8% from the third quarter of 2003.

Brinker International earned about a penny more than analysts had forecasted during its first fiscal quarter, but said that September same store sales declined by -0.6%, due to a 2.8% decrease in traffic, partially offset by a 2.2% price increase. It was refreshing that the company blamed their own actions for the slower sales growth. The company said that some of its newer menu items didn't resonate as well with customers as it thought they would. The company said they will use product testing before rolling out new menu items instead of "instinct and intuition".

AK Steel announced earnings that jumped from a loss last year to $0.63 per share (excluding non-operating items). Shipments increased 2.6% and pricing improved by 32% over the third quarter last year. The company expects the price to rise another 2% during the current quarter.

Caterpillar reported that third quarter earnings per share soared 127% from last year with sales jumping 32%. To help combat the surging raw materials costs and supply bottlenecks the company sent teams to its suppliers to help resolve shortages and expedite orders to customers. The company said that they had 80 products on managed distribution. Additionally, the company noted that there is a shortage of radial tires and they are suggesting that customers substitute bias tires when practical.

An analyst asked why operating costs increased instead of declining as the company guided during the second quarter conference call. The company's reply: "...about the time we issued our second quarter release, we had seen some relief in scrap prices. In fact, they had started to go down in what we thought was going to be a trend. It turned out to be a very short blip and they turned around and went back up, which maintained the pressure on steel prices that we had anticipated were going to start to abate. And that did not happen. You used the term inefficiencies as being the only piece of this. That's certainly not the major piece of this. It's material costs, expediting, surcharges, premiums paid for steel supply and so forth. Inefficiencies are part of it on the shop floor, but certainly not the major part of it."

China has become such a powerful force that has affected any company that relies on commodities. Much of the growth in the Chinese economy is coming from building its infrastructure which Caterpillar's products are used for and it can offer unique insight on the outlook of China. The company commented on how the governmental controls are affecting the economy.

" It's hard to know what they're going to do with putting these specific controls on. As you know, it's not an economic-driven downturn in construction equipment, but very specifically controlled by the government to sort of pinpoint construction projects and slow that activity up. Let me give you a little detail. On a quarter-over-quarter basis in China, our dealers' sales to users in net dollars are down 56 percent, and the year-to-date decline is 17 percent. Now expectation going forward in 2005, it is really hard to say because it does depend on what the government of China does. If they take their foot off of the brake, we will see more activity. If they don't, it will be where it is. A lot of speculation, but I'm not sure anybody has the real facts at this point."

"... there is still a very focused effort by the government to pinpoint certain projects and hold them off of the boards. And I think our expectation is that they will continue to do that until such time as they believe the economy, the growth in the economy, is at a level that they can sustain. I would just say that, while there is some short-term pain here from the standpoint of the dealer deliveries of machines going down at the level that they have, from a long-term perspective, we view this certainly as positive action to put the economy in a position to grow at a pace that can be sustained, and that those projects that are being held up at some point in time will go forward because the demand is there. And so really from a long-term perspective, we certainly support the actions that are being taken."

Companies have been meeting analysts' estimates, but remain very cautious regarding the rest of the year and for next year. Investors have been focused on earnings over the past couple of weeks, but the Presidential election and the gyrations of oil and other commodities have been a distraction. Thankfully, one of the distractions will be over next week - hopefully. Although it might be interesting if the electoral college gets split 269 - 269.

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