Will the shutdown become an earnings scapegoat?

The closure may give executives a way to play down other headwinds hampering their ability to deliver growth.

By The Fiscal Times Oct 25, 2013 2:43PM
Image: Dollar bills floating over U.S. Capitol © CorbisBy Suzanne McGeeThe Fiscal Times logo

For most of the year, analysts have been promising us that the slow rate of growth in corporate profits in the first six months of 2013 would be more than offset by stronger earnings in the second half of the year, thanks to what they confidently assured would be a strengthening economy.

Whoops.

By the end of the third quarter, analysts (as calculated by Thomson Reuters) were predicting earnings growth would be a mere 4.8 percent, well below the 8.5 percent growth they had predicted earlier in the year. That’s about where the forecasts stand today -- as long as you exclude JPMorgan Chase (JPM) from the calculation. Once you add their big loss to the mix, the figure falls to only 2.3 percent.

This leaves the markets with a big conundrum. On the one hand, stocks have rallied tremendously this year, gaining about 23 percent. On the other, earnings growth hasn’t kept pace, stuck at around the 4 percent level and, even if we see a blockbuster fourth quarter, is likely to remain in that range for the year as a whole.

That means that the market rally has been in large part because investors are willing to pay more for every dollar in corporate earnings: The S&P 500 now trades at a whopping 19.5 times reported profits in the previous 12 months, significantly above the 15 times earnings that represents the long-term valuation norm.

That was just fine and dandy, as long as the forecast that earnings would see big gains seemed reasonable. In the absence of the second-half rebound in profits, however, it’s more questionable.

A new round in the blame game
Sometimes, companies cite logical and reasonable reasons for why they can’t deliver the kind of profits they had promised their investors. A case in point is Europe’s recent economic meltdown. Companies like Starbucks (SBUX) that had pushed forward with expansion plans in Europe suddenly found themselves with new fixed costs and a slump in demand as cash-strapped Europeans dialed back their discretionary spending. That’s a no-brainer.

In other cases, companies playing the “blame game” have raised more than a few eyebrows. Back in the 1990s, the O.J. Simpson trial was blamed by a handful of companies: Apparently, people spent so much time glued to their television screens, they weren’t shopping enough. Weather that is too bad – cold or rainy, keeping people indoors – or too good, tempting folks to hang out in their backyards rather than head to the mall, is often cited by retailers, even those whose fashion offerings may be off-trend and more to blame for a slip-up in sales or profits.

Go back to 2007 and you’ll see what I mean. Back then, the subprime crisis was already gripping the financial sector, and sure enough, affecting earnings, with Merrill Lynch writing down its inventory of subprime mortgages. It was a little odd, however, to see IBM blame what was happening to its financial services customers for the fact that its hardware sales didn’t measure up to expectations, even though its overall profits rose significantly more than did most of its peers in the S&P 500 index. And was the subprime credit crunch really responsible for a crunch in profit margins at Hershey? Certainly, the candy company seemed to want to convince investors that it was, arguing that its distributors placed fewer orders because rising interest rates made holding inventories more expensive.

Just under half of the companies in the S&P 500 have reported their third-quarter results so far, and already we've heard companies as varied as Citigroup (C), Linear Technology (LLTC) and Stanley Black & Decker (SWK) blame the dysfunction in Washington for an actual shortfall in earnings or a possible earnings "miss" in the fourth quarter. In an interview with CNBC, Southwest Airlines (LUV) CEO Gary Kelly tempered expectations for revenues in October, saying he expected an increase, but "not as high as it would have been had the government not shut down."

"Consumers were out there buying and flying," Kelly said. "We were having a grand time until the government shut down in October, but we're still looking at a very good fourth quarter."

Delta Air Lines (DAL) President Ed Bastian this week told analysts that holiday bookings look strong, but that the shutdown reduced revenue by up to $25 million. Costco (COST) CEO Richard Galanti, by contrast, said that the shutdown didn’t impact his company, other than to leave executives "scratching our heads in disbelief."

It’s logical that companies that rely heavily on government contracts (some defense contractors may fall into that group) may have felt the pinch of the shutdown, at least temporarily. But as with Hershey, this is a time to listen for attempts to play the “blame game.”

It’s a tough economic environment for many companies to generate attractive levels of earnings growth. And it’s hard for a CEO or CFO to stand up and say so: that they weren’t able to wave a magic wand and squeeze margins that extra little bit. But given the growth in the market price/earnings ratio, the need to reach a bit further in search of not just an excuse but a bona fide reason for an earnings disappointment or lackluster growth in either revenues or profits is going to prove tremendously tempting. Companies across the spectrum are going to want to defend their new, higher multiples.

Companies playing the "blame game" may not be trying to find a scapegoat; they may not be trying to distract us from some kind of fundamental weakness. They just may not want us to remember that the second-half rebound in earnings that analysts had promised has yet to materialize.

True, the shutdown hasn’t helped the economy: Millions of Americans, many of whom already lived paycheck to paycheck, were reminded once again of how suddenly their personal finances can teeter on the edge of disaster. It’s likely to take months for confidence to return, and in that time period, the willingness to spend heavily on big-ticket items is going to decline. That’s logical. So, too, is it logical that we may see some of that expansion in P/E reverse itself.

So, when you start hearing companies cite "the shutdown" as a reason for underwhelming earnings, be skeptical. The shutdown may well have affected their results, directly or indirectly. But maybe, just maybe, some of those companies see a convenient excuse and a way to play down other headwinds hampering their ability to deliver both quantity and quality earnings growth.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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55Comments
Oct 25, 2013 3:44PM
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The shutdown didn't occur until October which isn't in the 3rd quarter of 2013 last time I checked!
Oct 25, 2013 3:09PM
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Welp, it's official, according to the Census, we have more people collecting welfare than we have working.

It seems the 47% deadbeat class has surpassed 50%.   I wonder if that is because we reward sloth and punish work?   I wonder how long it will be until near 100% live off the government and no one works or produces anything and we all become democrats...
Oct 25, 2013 8:39PM
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Pretty sure out and out LOSERS can't stick a scapegoat with this. The markets are way too overdue for crashing and everyday of delay is another day of decay. Die already... you can't survive without QE.
Oct 27, 2013 8:45AM
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YOU KNOW - YOU AMERICANS SHOULD BE SCARED TO DEATH!!!

FOR ME TO WITNESS THE MEDIA  "INFORM" THE POPULATION WITH DIFFERENT CONTENT DEPENDING ON THEIR BRAND NAME SHOULD TELL PEOPLE THEY ARE BEING BRAINWASHED BY SOMEBODY!!!!

BUT NOOOOOOOOO - - - - -  THERE'S TOO MUCH "BRAIN DEATH" IN AMERICA!!!


Oct 27, 2013 8:50AM
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The problem with political jokes is they get elected.
        ~Henry Cate, VII~
        
Oct 27, 2013 8:40AM
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HERE'S WHAT OBAMACARE IS DESIGNED FOR:


You just never know what is in your own backyard. 

 Police in Detroit announced the discovery of an arms cache of 200 semi-automatic rifles with 25,000 rounds of ammunition, 200 pounds of heroin, 5 million in forged US banknotes and 25 trafficked Latino prostitutes -- all in a semi-detached house behind the Public Library on Woodward Ave.

 Local residents were stunned, and a community spokesman said: "We're all shocked; we never knew we had a library.


Oct 26, 2013 1:05PM
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It really doesn't matter! Computers are doing the buying and selling now!
Oct 27, 2013 8:51AM
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If we got one-tenth of what was promised to us in these State of the Union speeches, there wouldn't be any inducement to go to heaven.
        ~Will Rogers~
Oct 27, 2013 8:51AM
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 Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.
        ~Oscar Ameringer~
Oct 27, 2013 8:49AM
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We hang the petty thieves and appoint the great ones to public office
        ~Aesop~
Oct 27, 2013 8:34AM
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If nothing else has pissed you off about this administration this might get to you. The US has entered into a contract with a real estate firm to sell 56 buildings that currently house U.S. Post Offices. The government has decided it no longer needs these buildings, most of which are located on prime land in towns and cities across the country. The sale of these properties will fetch about $19 billion. A regular real estate commission will be paid to the company that was given the exclusive listing for handling the sales. That company is CRI and it belongs to a man named Richard Blum. Richard Blum is the husband of Senator Dianne Feinstein.   Senator Feinstein and her husband stand to make a fortune (est. at between $950 million and $1.1 billion!!) from these transactions. His company is the sole govt real estate agent on the sale. CRI will be making a minimum of 3% and as much as 6% commission on each and every sale.

All of the properties that are being sold are all fully paid for. They were purchased with U.S. taxpayers’ dollars. The U.S.P.S. is allowed free and c lea r, tax exempt use. The only cost to keep them open is the cost to actually keep the doors open and the heat and lights on. The United States Postal Service doesn't even have to pay county property taxes on these subject properties. Would you put your house in foreclosure just because you couldn't afford to pay the electric bill? Well, the folks in Washington have given the Post Office the OK to do it! Worse yet, most of the net proceeds of the sales will go back to the U.S.P.S, an organization that is so poorly managed that they have lost $117 billion dollars in the past 10 years! No one in the mainstream media is even raising an eyebrow over the conflict of interest and on the possibility of corruption on the sale of billions of dollars’ worth of public assets. How does a U.S. Senator from San Francisco manage to get away with organizing and lobbying such a sweet deal? Has our government become so elitist that they have no fear of oversight?
Oct 27, 2013 8:34AM
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Excellence is punished.
Mediocrity is rewarded.
And dependency is to be revered.
This is present day America.
When people rob banks they go to prison.
when banks rob people they get bailed out!!!!!
When the government robs the taxpayer they get re-elected.
IN GOD WE TRUST
Oct 27, 2013 8:37AM
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 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006
Oct 27, 2013 8:35AM
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A PEN IN THE HANDS OF THIS PRESIDENT:

 IS FAR MORE DANGEROUS THAN ASSAD, OR MILLIONS OF ROCKET LAUNCHERS AND MACHINE GUNS IN THE HANDS OF THE LAW ABIDING CITIZENS IN THIS COUNTRY!!!

THAT GOES FOR ALL OF HIS ELVES TOO!!!
Oct 27, 2013 8:52AM
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I have come to the conclusion that politics is too serious a matter to be left to the politicians.
        ~Charles de Gaulle~
        
Oct 27, 2013 8:50AM
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When I was a boy I was told that anybody could become President; I'm beginning to believe it.
        ~Clarence Darrow~
Oct 27, 2013 8:52AM
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Instead of giving a politician the keys to the city, it might be better to change the locks.
        ~Doug Larson~
        
Oct 27, 2013 8:43AM
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Bob: "Did you hear about the Obama administration scandal?"
Bill: "You mean the Mexican gun running?"

Bob: "No, the other one."
Bill: "You mean SEAL Team 6 Extortion 17?"

Bob: "No, the other one."
Bill: "You mean the State Dept. lying about Benghazi?"

Bob: "No, the other one."
Bill: "You mean the voter fraud?"

Bob: "No, the other one."
Bill: "You mean the military not getting their votes counted?"


Bob: "No, the other one."
Bill: "You mean the president demoralizing and breaking down the military?"

Bob: "No, the other one."
Bill: "You mean the Boston Bombing?"

Bob: "No, the other one."
Bill: "The NSA monitoring our phone calls, emails & everything else?"

Bob: "No, the other one."
Bill: "You mean the president wanting to kill Americans with drones in our own country without the benefit of the law?"

Bob: "No, the other one."
Bill: "Giving 123 Technologies $300 Million and right after it declared bankruptcy it was sold to the Chinese?"

Bob: "No, the other one."
Bill: "You mean the president arming the Muslim Brotherhood?"

Bob: "No, the other one."
Bill: "The IRS targeting conservatives?"

Bob: "No, the other one."
Bill: "The DOJ spying on the press?"

Bob: "No, the other one."
Bill: "Sebelius shaking down health insurance executives?"

Bob: "No, the other one."
Bill: "Giving SOLYNDRA $500 MILLION DOLLARS and right after they declared bankruptcy 3 months later the Chinese bought it?"

Bob: "No, the other one."
Bill: "The NSA monitoring our phone calls, emails and everything else?"

Bob: "No, the other one."
Bill: "The president's ordering the release of nearly 10,000 illegal immigrants from jails and prisons and falsely blaming the sequester?"

Bob: "No, the other one."
Bill: "The president's threat to impose gun control by Executive Order in order to bypass Congress?"

Bob: "No, the other one."
Bill: "The president's repeated violation of the law requiring him to submit a budget no later than the first Monday in February?"

Bob: "No, the other one."
Bill: "The 2012 vote where 115% of all registered voters in some counties voted 100% for Obama?"

Bob: "No, the other one."

Bill: "The president's unconstitutional recess appointments in an attempt to circumvent the Senate's advise-and-consent role?"

Bob: "No, the other one."
Bill: "The State Department interfering with an Inspector General investigation on departmental sexual misconduct?"

Bob: "No, the other one."
Bill: "HHS employees being given insider information on Medicare Advantage?"

Bob: "No, the other one."
Bill: Clinton, the IRS, Clapper and Holder all lying to Congress?"

Bob: "No, the other one."
Bill: "I give up. Oh wait, I think I got it! You mean the 65 million brain-dead voters who stuck us again with the most corrupt administration in American history?"

Bob: "THAT'S THE ONE!"
Oct 27, 2013 8:36AM
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Hey -  OUR GOVERNMENT HAS SHOWN THEIR EXPERTISE WITH COMPUTER SYSTEMS.

NOW I WODER ABOUT OUR NUCLEAR WEAPON ARSENAL ABILITY!!!!!!!

I BET NOBODY HAS EVEN THOUGHT ABOUT THAT!!

DO YOU SUPPOSE???????
Oct 27, 2013 8:53AM
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A politician is a fellow who will lay down your life for his country.
        ~ Tex Guinan~
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