Good news for US companies: Customers are back
Recent earnings results from some of the biggest names show signs of a return to basic revenue growth.
Many big American companies are starting to see a turn they have long hoped for: Customers want to buy more of what they are selling.
For much of the past two years, lackluster sales forced companies to boost earnings by cutting costs, squeezing suppliers and buying back stock. But second-quarter results for companies in the Standard & Poor's 500 Index ($INX) show signs of a return to basic revenue growth.
Overall revenue at the 500 largest U.S. companies by stock-market value is on track to climb about 4.3 percent from last year's second quarter, based on earnings-season results for about three-fourths of the firms and analysts' projections for companies that haven't reported their results yet.
That would be the biggest percentage gain since 2012's first quarter, according to Thomson Reuters. Profits are expected to increase 7.7 percent in the second quarter, the fastest growth since the fourth quarter of 2013.
Next year is likely to be "another very, very good year simply because you've got a lot more business coming in the funnel to manage," said Christopher Nassetta, chief executive of Hilton Worldwide Holdings (HLT).
Other big companies still sound cautious. "The world macros out there have been volatile and weak in some cases for a time," Colgate-Palmolive (CL) Chief Executive Ian Cook said after the consumer-products maker reported 11 percent profit growth but a slim 0.1 percent increase in net sales. He said the company began feeling it late in the second quarter.
Sluggishness in emerging markets slowed purchases of essentials such as toothpaste and soap. Church & Dwight (CHD), the maker of Arm & Hammer products, suggested that many Americans have less disposable income. "They are having to make hard choices," said the company's chief executive, Jim Craigie. Second-quarter profits and revenue rose less than 3 percent.
Investors also were rattled last week by concerns that the Federal Reserve would dial back its economic support and new signs of trouble in Europe.
So far, though, the acceleration in revenue growth is consistent with government data last week that showed gross domestic product rose at an annual rate of 4 percent in the second quarter -- a big improvement from the first-quarter decline of 2.1 percent. Companies also built up inventories, a sign that they anticipate stronger sales.
Hiring for the past six months has been strong, and U.S. manufacturing activity accelerated in July, hitting a three-year high, according to the Institute of Supply Management.
Another test of the resilience in revenue will come as retailers report their latest quarterly results, starting with Michael Kors Holdings (KORS) and Coach (COH) this week. Their performance will help indicate whether average American consumers are getting comfortable enough to stretch a bit to buy entry-level luxury handbags and apparel.
While the U.S. stock markets capped off their biggest weekly slide of the year on Friday, earnings and revenue announcements for the second quarter have been largely positive. Among companies in the S&P 500 that have reported results, about two-thirds beat analysts' sales targets, the highest percentage since mid-2011, according to Eric Slover, U.S. equity strategist at Barclays.
In the first quarter, about half of the companies beat analysts' revenue expectations. About 70 percent of companies have beaten second-quarter profit estimates, in line with recent quarters. "There was a lot of optimism in the numbers, and so far it's panned out very well," said Howard Silverblatt, senior index analyst with S&P Dow Jones Indices.
Revenue gains have been broad-based. The biggest improvements include revenue growth of 12 percent at big health-care companies, while technology firms are expected to have revenue growth of about 6.5 percent, according to Thomson Reuters. Revenue growth is expected to reach about 3 percent at telecommunications, basic materials and consumer-staples companies -- and nearly 5 percent in the consumer discretionary sector.
The financial and utility sectors have lagged behind, with second-quarter revenue growth of 0.7 percent and 1.6 percent, respectively.
Garmin (GRMN) reported a 12 percent rise in revenue that was the biggest by the maker of navigation devices since 2011's first quarter, according to S&P Capital IQ. Garmin raised its full-year forecasts for revenue, profit and operating margins. A Garmin spokesman said the company's results were driven by its fitness segment and additional product lines.
Coffee chain Starbucks (SBUX) boasted a 6 percent gain in same-store sales, which Chief Executive Howard Schultz called "a stunning achievement on a base of over 6,800 stores" and the still-challenging U.S. economic landscape. Starbucks said revenue rose 11 percent, while profits grew 23 percent.
Cigna (CI) reported that its revenue rose 9 percent, fueling a 13 percent rise in net income. The health insurer's results were driven by higher premium and fee revenue, though investors remained concerned about the potential impact of rising medical costs from higher-than-expected use of medical services by individual policyholders.
Cigna projected revenue growth of 5 percent to 8 percent this year, up one percentage point from previous forecasts.
"Guidance has shifted from very, very negative to neutral," says Gina Martin Adams, institutional equity strategist with Wells Fargo Securities. Until the second quarter, companies "were pretty consistently reducing analysts' expectations going forward," she said.
General Electric's (GE) Jeff Immelt was upbeat, citing a record level of pending orders as a reason for optimism. "Our orders and backlog give us confidence in the second half and 2015," Mr. Immelt said.
GE reported a 13 percent increase in earnings and 3 percent rise in revenue, even as the company shrank its financial-services operations. Still, GE saw declines in orders for industrial equipment, which fell about 3 percent as customers postponed big-ticket purchases.
On Friday, Hilton reported a 35 percent profit jump on a 12 percent rise in revenue from higher room rates, improved occupancy levels and more stable government-related business.
Hilton increased its earnings forecast for the full year. The hotel chain approved the development of 135 hotels -- and expects growth to continue everywhere but the Middle East, where geopolitical tensions are weighing on travel demand.
Mr. Slover, the Barclays analyst, says the overall performance of the 500 largest companies in stock-market value is "a much higher-quality quarter relative to expectations." As earnings announcements neared, analyst estimates didn't drift downward as much as they usually do, he added.
Analysts expect revenue to grow 4.3 percent again in the third and fourth quarters, according to Thomson Reuters. Earnings growth is likely to climb even more, as some companies keep leaning on profit-boosting strategies such as holding back on capital spending until the economy gains more momentum.
—Serena Ng and Anna Wilde Mathews contributed to this article.
More from The Wall Street Journal
Want to know how the economy is doing? Don't ask a financial analyst, they're worse than economists in their vanity and variety of opinions.
Simply look out your window once in awhile. Truck traffic is up big time on interstate highways. Navistar announced in April it is increasing truck production some 20%. More goods are moving through the supply chain and there is only one reason for it: Slowly but steadily increasing demand (which means more jobs). Get used to it gloomers and doomers.
Oh, and Ford is moving its heavy truck production for 2015/16 from Mexico to Ohio.
Analysts are paid to Pump and basically little of anything us. They are hardly any source to trust. Consumers whom are mired in Debt are now taking on more debt Again, that hardly news to Celebrate. Also, most Consumers already have way too much stuff, so really what's the point.
Eventually this got to have the latest craze will led to another Bubble bursting. If anyone saw 60 Minutes last Sunday and their piece about the China Real Estate Bubble, then you know what's coming sooner, then later. You can't have Global Debt soar 40% and continually live in a Fool's Paradise. Good News for Corporate America usually translates to Bad news aka more Debt for the Average American. This will not end well.
Copyright © 2014 Microsoft. All rights reserved.
As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.