July 20, 2012
No one these days appears to be exempt from some kind of earnings disappointment. True, earnings as a whole appear mildly encouraging, with perhaps two-thirds of those companies in the S&P 500 announcing some kind of positive surprise. But the pattern remains intact: those positive surprises often are only defined when measured against recently-reduced analysts’ estimates.
Buried within the numbers, there are facts or figures that, in the absence of headline news in a few weeks’ time, will give anxious bears fresh cause for concern.
Take Google, for instance. Android devices may be finding a place in the hearts of consumers (at least, those who haven’t already entrusted their hearts and minds alike to Apple and the iPhone and iPad devices), but is Google laughing all the way to the bank?
The company did report a healthy increase in profits and revenues, but advertiser payments per click, a key metric, were 16 percent lower than they were a year ago, even as the number of paid clicks (the number of times a Google user clicks on one of those ads displayed on its pages) rose. That’s not a dynamic that is likely to make investors feel like extending the rejoicing.
It’s the first time that Google has reported earnings since completing the acquisition of Motorola Mobility, and the latter’s negative margins were a stark contrast to Google’s own healthy ones: can Google transform this into a division that boosts its own bottom line?
The absence of any insight into what lies ahead for Motorola within the embrace of Google – execs didn’t provide any clues as to their thinking during the conference call – will also likely dampen at least some of any enthusiasm created by Google’s 11 percent jump in profits and a 35 percent increase in revenue. Odds are that it will take several quarters – if not longer – for the market to grasp the benefit of the key assets of the $12.5 billion acquisition: Motorola Mobility’s extensive patent portfolio.
Then there’s Microsoft. A $6.2 billion writedown tied to the company’s acquisition of aQuantive, an online ad agency, left the technology giant with a black eye in the shape of its first quarterly loss as a public company. On an operating basis, that became a small profit – but of only 6 cents a share, down from the 69 cents a share it announced a year ago at this time.
The company’s CFO, Peter Klein, said Microsoft has cut its growth expectations for its online-services department for the year. This news is weighing on Microsoft’s stock this morning – and it means there is even more at stake when Microsoft unveils Windows 8 in October.
Moreover, Microsoft is one of a growing number of companies to report increases in profit that are higher than its increases in revenue, signaling that higher profits are due as much or more to the success of cost-cutting initiatives as to fundamental growth in the company’s underlying business. That’s a signal that makes many investors wary – and rightly so.
There was no celebratory feast at Chipotle Mexican Grill, which reported sales rose, but not by as much as analysts had hoped. In the case of a high-expectations stock like that of Chipotle, delivering the growth that investors already are betting on, is crucial, and the restaurant chain dropped the ball.
And while part of the 8 percent increase in revenues came from higher customer traffic, another part was thanks to price increases put in place last year. Same-store sale growth should be expanding at a faster clip to justify the company’s relative high valuation. Moreover, Chipotle is still in the early stages of its love affair with consumers; few were expecting that the slump in consumer confidence and retail spending would take a toll on this particular company so early on in the downturn.
In aggregate, second-quarter earnings continue to deliver just enough fuel to keep stock market investors reasonably content. But there isn’t enough optimism on the medium- to long-term picture in many of these announcements to continue generating optimism once earnings season wraps up and we’re back into a period dominated by economic news and the latest news flashes from Europe and China. Will Microsoft’s new upgrades be winners?
Very possibly, particularly amongs enterprise customers – but even a hint of a bug could cause sentiment to swing on a dime. Will Google find a way to monetize those patents and improve per-click revenues? I, for one, wouldn’t want to be against these guys – but this isn’t going to happen overnight, and investors can’t count on long-term trends to generate enough news to counteract bearish economic news in the coming months. And it’s even possible that Chipotle can find a way to lure new customers through its doors and improve their dining experience so that it becomes a logical alternative to Burger King.
The problem with second-quarter earnings isn’t with the earnings themselves. Rather, it is about the fact that so much is riding on these earnings at a time of anxiety and uncertainty. There aren’t many companies able to generate the kind of profits able to bear that kind of burden.