by Shawn Narancich, CFA
Vice President of Research
Resurrection before Insurrection The Dow industrials pushed through the 13,000 barrier again as investors warmed up to the latest jawboning from European policymakers and digested what will have been the heaviest reporting week of the second quarter earnings season. Over 600 U.S.-based companies confessed their quarterly numbers. While two-thirds have met bottom-line expectations, only about 40 percent have achieved anticipated sales levels and even fewer have upped their forecasts. Benchmark U.S. Treasuries slipped as investors succumbed to European Central Bank President Draghi’s promise to defend the Eurozone economy (quantitative easing, European style), sending yields up to 1.55 percent on the benchmark 10-year Treasury as investors bid stocks higher.
Technology Indigestion As the world’s largest publicly traded company, Apple garnered investors’ full attention, reporting 20 percent-plus sales and earnings growth that most companies would cherish in a slow-growth economy. Nevertheless, it’s all about expectations on Wall Street and, in this case, Apple failed them for only the second time in 39 quarters. Growth in device sales slowed and the commonly postulated explanation is that customers are waiting for the newest iPhone 5 to be delivered this fall. If past is prologue, the pain shareholders felt from 3 percent losses this week will prove temporary.
Meanwhile, Facebook shareholders may be feeling as if they’ve been run over by a Mack truck. Meeting sales and earnings expectations – something for which most newly public companies might be commended – was not good enough. Facebook added insult to injury by admitting that advertising growth has slowed as management struggles to monetize their presence on smart phones. No, they don’t plan to build one of their own, but they do need to figure out how to get advertisers to give their mobile application a thumbs-up. Performance since IPO: -38 percent. Because Zynga’s mobile games are distributed primarily through Facebook, all is not well in Farmville, either. The stock plunged 36 percent as its profits disappeared, literally and virtually.
Can Activist Investing Turn the Tide for P&G? Not all earnings news was so bad. Consumer staples stalwarts Colgate-Palmolive and Unilever both delivered on expectations through expansion in emerging markets, showing volume and price gains that are increasingly difficult to find in this space nowadays. In the zero-sum game that characterizes these companies’ business in developed markets, reported market share gains are likely coming out of Procter & Gamble’s hide. P&G’s stock is up lately on news that activist investor Bill Ackman has taken a small stake to agitate for better results from the lumbering giant. Investors can only hope that Ackman is successful because upcoming earnings here are unlikely to impress.
Slow As She Goes Corporate America’s collectively weaker top line was confirmed by Friday’s GDP report, showing that the economy expanded by just 1.5 percent annually in the second quarter. While exports weathered a weaker dollar, slower government spending and consumer spending weighed on output. And while headline durable goods numbers were encouraging, details showed that orders excluding the volatile transportation sector fell in June. Across the pond, European purchasing manager indices confirmed a deepening recession there. In China, preliminary July numbers were more encouraging.
Earnings season continues next week, with hundreds of additional companies reporting. On the economics front, investors will get an update on U.S. manufacturing activity from the monthly Purchasing Managers’ Index, and the payroll report for July will reveal how the jobs situation is unfolding domestically.
Our Takeaways from the Week
- Earnings reports confirm a slower growth economy worldwide
- Despite economic headwinds, stocks have logged double-digit returns year-to-date