When an Earnings Beat Misses

01/29/2013 2:00 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

There's a worrying trend building as the current earnings season unfolds, and it could cause problems next quarter, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Are we starting to see a pattern to earnings season? And does it point to problems not this quarter (as expected) but next?

Just about one-third (160) of the companies in the S&P 500 stock index have reported through January 28. To date, S&P 500 earnings are up 6%. That’s quite a bit better than the 2.5% earnings growth that analysts were expecting just before the start of the earnings season. About 61% of companies in the S&P 500 that have reported have come in above Wall Street earnings estimates.

The revenue picture is just as strong—and that strength is more surprising. Sales for the S&P 500 companies that have reported are up 4%. At the start of the quarter, Wall Street analysts had grown very pessimistic. They were projecting revenue growth of just 2% for the quarter.

But there is one trend this earnings season that isn’t quite so positive. Many companies that are reporting beats for the fourth quarter on earnings and revenue are then lowering guidance for the first quarter of 2013.

Caterpillar (CAT), which reported yesterday morning, is a good example of the trend. The company reported earnings of $1.91 a share (excluding a one-time charge against goodwill). That was 19 cents a share above the Wall Street consensus. Revenue came in at $16.07 billion, just a bit shy of the $16.2 billion projection.

Of course, that the figures were close to estimates at all was due to very low expectations for the quarter. Revenue, for example, fell 6.8% from the fourth quarter of 2011. The $1.91 a share that Caterpillar earned in the fourth quarter of 2012 was down from the $2.32 it reported in the fourth quarter of 2011.

But it was the company’s guidance that hurt—and that forms part of a worrying trend for the first quarter of 2013. Caterpillar told investors to expect revenue of just $14 billion in the first quarter (against a Wall Street consensus of $15.09 billion.) The company didn’t give specific guidance for earnings in the first quarter of 2013, but told Wall Street to expect something lower than the $2.37 the company reported in the first quarter of 2012.

In giving that guidance for the first quarter of 2013, Caterpillar noted that dealers didn’t finish working down excess inventory in the fourth quarter and had more to do before they began ordering again. Sales in China and the United States would pick up slightly, but Europe remained a huge question mark.

To my ears, Caterpillar’s remarks sound similar to what other companies have said about the first quarter. Listen carefully during the rest of earnings season to see if you hear a trend.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Caterpillar as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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