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S&P 500 Record Sales Belie Slower Growth Rate

Date: Monday, November 7, 2011
Author: Inyoung Hwang

Standard & Poor’s 500 Index companies are poised to report the biggest annual sales increase on record even as analysts reduce their estimate for growth in 2012.

Revenue in the benchmark gauge of American common equity will rise 11 percent to $1,052.42 a share in 2011, according to more than 10,000 forecasts compiled by Bloomberg. Projections for next year have been cut 1 percent in the past month after 43 percent of S&P 500 companies from 3M Co. (MMM) to Amazon.com Inc. (AMZN) missed third-quarter forecasts, the most since 2009, data show.

Bulls say record gains in sales mean the economy is doing well enough for equities to rally after price-earnings ratios fell 20 percent below the six-decade average. To bears, the deceleration in growth shows the European debt crisis is curbing the economy and that stocks will resume declines after the S&P 500 posted its biggest monthly rally since 1991.

“Everybody thinks the world’s coming to an end, but corporate America is doing great and it’s a function of good sales,” Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees about $6 billion, said in a telephone interview on Nov. 3. “It’s not unusual that you get these short-term slowdowns during panicky markets. The sales estimates coming down is a good thing because it allows to companies to meet or beat more easily.”

Stocks fell last week, with the S&P 500 losing 2.5 percent to 1,253.23, as Greece’s reluctance to accept another bailout and a disagreement over boosting the International Monetary Fund’s resources threatened Europe’s efforts to halt its debt crisis. Federal Reserve officials cut their outlook on Nov. 2 for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year.

October’s Rally

Last week’s slump followed an 11 percent rally in October fueled by S&P 500 profits that have exceeded analyst estimates by an average of 4.6 percent, the 11th straight quarter of better-than-expected earnings, data compiled by Bloomberg show. Futures on the S&P 500 that expire in December fell 1.1 percent after rising as much as 0.6 percent today.

While the Labor Department said Nov. 4 that U.S. unemployment was at least 9 percent for a seventh straight month, companies are poised to report their highest income and revenue ever. S&P 500 earnings rose 16 percent or more for seven straight quarters and American gross domestic product expanded by the most in a year between July and September.

Diverging Forecasts

The 11 percent gain in per-share sales that analysts project for 2011 follows a 4.9 percent advance in 2010 and a 9 percent decline in 2009, the biggest in data going back to 1993. The next-largest revenue increase on record was 10.7 percent in 2004, when it rallied 9 percent during the second year of a bull market. Analysts expect sales to climb 3.9 percent in 2012, according to data compiled by Bloomberg.

Forecasts for 2011 have climbed since the start of the year even as concern about Europe’s debt crisis spurred economists to lower predictions for GDP. Analysts predicted on Jan. 3 that revenue would rise 6.1 percent. Forecasts for U.S. economic growth fell from 2.6 percent at the start of the year to 1.7 percent now, according to the median of 80 estimates in a Bloomberg survey.

“An improvement in market sentiment with this combination of top-line sales growth will bode well for stock investors,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in a Nov. 2 telephone interview. “Sales growth is a bullish sign for equity markets to grind higher into year-end.”

Last Recession

While sales in the third quarter beat analyst estimates by 1.3 percent, the rate was down from 2 percent in the previous three months as more companies posted revenue that trailed forecasts than any time since the last recession. For the fourth quarter, estimates have decreased 0.6 percent to $264.59 per share, while the projection for 2012 is $1,093.83 a share, compared with $1,106.60 a month ago, Bloomberg data show.

3M fell 6.3 percent on Oct. 25, the most since 2008, after the maker of LCD television parts and Scotch-Brite sponges cut its 2011 forecast and posted profit that trailed analysts’ estimates for the first time in 10 quarters. Sales at the St. Paul, Minnesota-based company rose 9.6 percent to $7.53 billion, trailing the average analyst estimate of $7.78 billion.

Amazon, the world’s largest Internet retailer, reported net sales in the third quarter of $10.88 billion, missing the average analyst estimate of $10.94 billion, even as revenue benefited from surging Kindle orders. Operating results may range from a loss of $200 million to profit of $250 million, the Seattle-based company said. The shares fell 13 percent on Oct. 26, the biggest decline since October 2008.

Economy Versus Sales

The economy usually slows before sales, according to Komal Sri-Kumar, the Los Angeles-based chief global strategist at TCW Group Inc., which oversees about $120 billion. As Europe slips into a recession in the fourth quarter, corporations in the S&P 500 will find their clients becoming increasingly reluctant to make orders for 2012, he said.

“In terms of 2011 compared with 2010, the earnings growth of the S&P 500 was out of whack with the slowdown of the U.S. economy,” Sri-Kumar said in a telephone interview on Nov. 3. “That doesn’t last too long. After a while profit and sales growth have to come back to consistency with the economy. That’s what we’re seeing take place in the fourth quarter of 2011 and we’ll see happen in the first half of 2012.”

S&P 500 revenue projections for the first quarter have dropped 1.7 percent in the past month to $260.07 a share and 1.5 percent for the second quarter to $268.48 a share, Bloomberg data show.

‘Mild Recession’

European leaders last week for the first time raised the prospect of the euro area splintering. The European Central Bank unanimously lowered the benchmark interest rate by 25 basis points to 1.25 percent on Nov. 3. It took the step because “what we’re observing now is slow growth heading toward a mild recession,” ECB President Mario Draghi said.

Equities will rally as companies exceed analysts’ prediction in the fourth quarter, according to Uri Landesman, who helps oversee $1 billion as managing general partner of New York-based hedge fund Platinum Partners LLP. If sales growth does decelerate, companies will boost activity in mergers and acquisitions in order to expand, he said.

“Analysts have overreacted,” he said in a Nov. 3 phone interview. “Post Thanksgiving, people are going to realize stocks are pretty cheap given the growth that we’ve seen.”

No Recession Signal

Caterpillar Inc. (CAT), the world’s largest construction and mining-equipment maker, posted higher-than-expected third- quarter profit and record sales on Oct. 24. The Peoria, Illinois-based company also said 2012 revenue will gain as the U.S. and global economies improve. While the European debt crisis and the level of U.S. growth are concerns, they don’t “signal the onset of recession,” Caterpillar said.

Demand for U.S. products is rising outside Europe for industrial companies, said Richard Skaggs, senior equity strategist at Loomis Sayles & Co., which manages about $160 billion. China, the second-largest economy, grew at pace of 9.1 percent during the third quarter, helping fuel Caterpillar’s sales from Asia, which increased 55 percent from a year earlier, the biggest jump out of four regions.

“The underlying horsepower of the S&P 500 companies is still strong,” Boston-based Skaggs said in a telephone interview on Nov. 3. “We’ve been fighting the gremlins here over the last few months as the sell-off had the feel of fear of recession. While not dynamic, we don’t feel like the economic data is pointing toward recession.”