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Jubak's Journal
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Earnings aren't bad, just not good enough
Fourth-quarter profit reports are better than expected, and many companies are forecasting modest improvements ahead. Why are so many of their stocks getting hammered?
By Jim Jubak
If you keep in mind the steep rally from last Octobers low, the way stocks are behaving this earnings season makes perfect sense.
Shares of Intel (INTC, news, msgs), for example, should have dropped by almost 10% in the days after the company reported earnings that were about 14% higher than Wall Street expected for the fourth quarter of 2002.
Why did Intel go down instead of up on that report?
Because Intel shares had climbed a whopping 35% from their Oct. 8 low as investors anticipated a recovery in Intels business in the second half of 2003.
At $17.79 a share, the stocks closing price before the company reported, Intel shares traded at 28 times projected 2003 earnings per share.
And Intel didnt give investors anything new to make them feel more certain that the projected earnings for 2003 that theyd already paid for would actually materialize.
Rethinking the second-half recovery
Most investors buying stocks now -- or last fall -- are buying on expectations for recovery in the second half of 2003.
It now looks like economic growth slumped to somewhere near 0.5% in the fourth quarter of 2002 after growing at a 4% clip in the previous quarter.
The consensus among economists is for very modest 2.5% growth in the first three months of 2003 -- but for a gradual acceleration in growth as the year progresses. Investors hope that pickup will be enough to jump start business spending on technology equipment and other kinds of capital equipment.
Intel didnt do anything to upset that apple cart, but the companys report also didnt provide any concrete evidence that the long-awaited turn is just around the corner.
The company said it saw lower revenue ahead in the first quarter of 2003 and higher revenue in the second half, exactly what investors had already priced into the stock. But Intel reported that it saw no signs of a pickup in corporate spending on technology. The company further cut its own plans for capital spending in 2003 by as much as $400 million.
Its not just Intel
Company after company -- in and out of the technology sector -- is repeating Intels message this earnings season. Often after investors have bid up that stock even more strongly than Intels.
For example, Charles Schwab (SCH, news, msgs), up 70% since October, reported fourth-quarter revenue 6% lower than in 2002 but looked forward to better times in the second half of 2003. Before dropping on its earnings news, shares traded at 28 times projected 2003 earnings.
Faith in a second-half recovery in economic growth, in business investment and in corporate profits has taken stocks solidly off their October lows. But with the recent prices of many stocks discounting that recovery, many investors would now like to see some concrete evidence that the economy will indeed pick up as 2003 progresses.
Instead, theyre getting more uncertainty as companies report. General Electric (GE, news, msgs), for example, says that earnings growth for 2003 will come in somewhere between 3% and 13%. At 7%, the Wall Street consensus is just about smack dab in the middle of that range.
But thats not much help to investors who know that GE ultimately wont trade on the consensus but on real earnings that can as easily fall at the extremes of that range as in the middle. (GE is the parent of CNBC.)
The news this earnings season isnt bad -- its just not giving investors new reasons to pay more for what remains a very, very uncertain second-half recovery.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately
5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Charles Schwab. He does not own short positions in any stock mentioned in this column.
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