This Earnings Season, Company Revenue Is Up to Snuff

Companies’ sales look like they are starting to recover from a six-month slump.

So far this quarter, 66% of companies have reported revenue higher than Wall Street expected, according to Thomson Reuters. While that is slightly above the historical percentage–an average of 62% have beaten sales expectations since 2002–it constitutes a shift from the previous two quarters.

“This is an especially large reversal from recent quarters for sales beats,” said Savita Subramanian, a U.S. equity strategist with Bank of AmericaMerrill Lynch, in a note to clients. Sales growth is “crucial” this quarter, she added, since companies have “already lean cost structures.”

Sales were dismal in the second and third quarters of last year, when more companies missed analyst expectations for sales than exceeded them.

In fact, sales actually fell in the third quarter, declining 0.8% from the same quarter the previous year. It was the first time that had happened since 2009. The aggregate sales of all companies in the Standard & Poor’s 500-stock index came in 1.1% below analysts’ expectations, according to Thomson.

In the third quarter shares responded more to whether companies beat sales estimates than earnings estimates for the first time since 2009, according to Bank of AmericaMerrill Lynch. For the companies that beat sales estimates, shares made bigger gains than they had since the bank started tracking that data nearly a decade ago.

It isn’t clear whether that trend will stick for fourth-quarter reports. PNC Financial Services Group Inc. (PNC) beat Wall Street estimates on sales, but not earnings, and saw shares gain 3.7% on its report, on a day when indexes rallied broadly.

Tuesday, Google Inc. (GOOG) beat earnings estimates but not sales, and shares still jumped 6.5% Wednesday, as the Dow Jones Industrial Average and Nasdaq Composite Index climbed but the S&P 500 remained mostly flat.

While companies have been reporting surprisingly strong sales, those surprises come amid lowered expectations for corporate sales. Before earnings reports began, analysts expected 1.9% fourth-quarter revenue growth from the previous year. In April 2012, analysts expected nearly four times that percentage, looking for 7.2% sales growth.

And earnings season is still young. Ninety-nine companies in the Standard & Poor’s 500-stock index have reported earnings, so nearly four-fifths of the companies in the index have yet to report.    

Source: Dow Jones

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