Saturday, July 31, 2010

Earnings Better Than Expectations and Revenues In Line

As the below graphic details, earnings have certainly improved compared to the end of the first quarter (first third of chart).

From HORAN Capital Advisors
According to Thomson Reuters, of the 336 S&P 500 companies that have reported earnings through the end of July, 75% have reported earnings above expectations. In a typical quarter since 1994, 62% of companies have beat expectations.

The market seems focused not only on earnings but on revenues as well. It is true revenues do drive earnings so long as sales are not generated by steep discounting resulting in slim or no gross margins. Again, according to Thomson Reuters, of these 336 companies, 64% reported revenues above analyst expectations, 0% reported revenues in line with analyst expectations, and 36% reported revenues below analyst expectations. Over the past four quarters, 61% of companies beat the estimates, 0% matched and 39% missed estimates. In the aggregate, companies are reporting revenues that are equal to estimates.

One factor to keep an eye on is the preannouncement ratio. For Q3 2010, 46 companies have provided negative earnings guidance while 15 have provided positive guidance. This equates to a negative/positive preannouncement ratio of 3.1. The N/P ratio for Q3 is above the long term N/P ratio of 2.1 for the S&P 500 Index.

From HORAN Capital Advisors

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