The case of the missing revenue

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The case of the missing revenue

This may be the middle of the U.S. earnings season, but it’s definitely not the middle of revenue season.

By (Reuters)

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Published: Sat 25 Jul 2009, 2:58 PM

Last updated: Thu 2 Apr 2015, 3:00 AM

Investors have bid stocks higher during this quarterly reporting season as corporate America counters falling revenue by cutting costs to boost profits.

The S&P 500 is up 11 percent since July 10.

But the rally may not last in the next busy week of corporate results if there are more Microsoft-sized revenue disappointments.

The software giant posted in-line profits for its most recent quarter on Thursday, but quarterly revenue fell 17 percent, some $1 billion below analysts’ estimates, prompting one analyst to call it “the case of the missing revenue.”

Microsoft traded down 8.3 percent Friday, and took the shine off a rally on Wall Street that had pushed the Dow industrials above 9000 for the first time since January.

The result was a stark reminder that the current pattern of higher earnings based on trimming costs cannot be sustained indefinitely.

“Once again, we have a situation where the vast majority of companies are beating bottom-line estimates but doing it through continued cost reductions,” said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto.

“This is as much of a faith-based rally as you’re going to see. The extent of the cost reductions are impressive, but it’s not a bottomless pit — the problem is that the day you get rid of all of your employees, you’re not in business anymore.”

Of the 180 S&P 500 companies that reported earnings by the market’s open on Friday, 140 beat profit expectations, according to data from Brown Brothers Harriman. However, just 95 companies have exceeded revenue expectations.

What adds to the bullishness is the improvement in corporate outlooks. According to Bespoke Investment Group, 9.5 percent of companies have raised their earnings guidance, while 4.4 percent have lowered, a dramatic turn from previous quarters, when the majority of companies were lowering guidance.

That helps investors think positive. “We as investors understand that times are tough and results are likely to be choppy. It’s the future we’re interested in,” said Lawrence Creatura, fund manager at Federated Clover in Rochester, New York.

Oil Companies on Tap

With less than half of the S&P companies having reported to date, investors will be doing overtime sifting through earnings reports in the weeks ahead. So far, the blended growth rate is minus 31 percent for the quarter, according to ThomsonReuters.

Next week some of the big U.S. energy companies will debut, including Conoco Phillips , Exxon Mobil Corp , and Chevron Corp .

Some are concerned that Chevron could fall short of expectations. The company’s per-share estimate of 95 cents a share is down from the $1.21-per-share consensus 30 days ago, according to ThomsonReuters estimates.

The oil companies overall may be hit due to lower oil and gas prices hitting exploration revenues, and a difficult refining market hurting refining margins.

Investors will hope to hear about improved demand from the oil majors, which has bolstered other commodity-related shares.

So far, investors have been prepared to swallow a shrinking top line for a few dollars squeezed out of costs and the hope of a better economy further down the road. Hopes of a China-led recovery, a boost from government stimulus spending, and a stabilizing housing market have been among factors enticing investors to keep their money on the table.

But this is likely to be the last earnings season where investors put up with shrinking revenues combined with murky outlooks.

“During next quarter’s announcements, if managements are not talking about revenue stabilization and improvement on a forward-looking basis, then that is going to be disappointing.” said Creatura.

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