Caterpillar, General Motors, SBC Communications, and Sears reported earnings this week. CAT, GM, and Sears all beat estimates and their stocks dropped. SBC reported flat earnings and rising revenue. It dropped a bit, too. Great companies, great earnings, growing revenue, rock bottom Price/Earnings ratios -- these companies can't seem to get a break.
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But first, why do we care about earnings? Well, strictly speaking, we don't. The Foolish Four strategy focuses on dividends, not earnings. Of course, without earnings a company can't continue to pay dividends, at least not for very long. A Foolish Four purist can easily ignore earnings, though. One of the most appealing things about the strategy is the idea that you only have to pay attention to it once a year. In fact, the strategy might even be more successful when one doesn't pay a lot of attention to it because the road to a turnaround can be a rather bumpy one with boring, or scary, scenery. We've seen a lot of that recently.
Still, earnings are the single most important factor when it comes to investing. Companies are valued off their earnings, or more properly speaking, they are valued based on the market's perception of future earnings. So today we look at earnings. But if you want to be a true buy-it-and-forget-it investor, you can skip the rest of today's column and read this post instead. It has nothing to do with earnings or the Foolish Four, but it is very diverting.
Foolish Four Portfolio stock Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> turned in another terrific quarterly report, yesterday beating analysts' estimates and showing growing earnings and revenues. The stock dropped almost a dollar.
I just don't get it. Revenues were up 5% over the second quarter last year and earnings per share are up 15%. For a company of this size, that's pretty darn good. And they managed to lock up the catdotcom URL (ahead of Cat Fancy, Cat World, and Kit'n Kaboodle to mention a few that may have wanted it), which I think shows a good bit of techno-net savvy. What more can the market want? Earth movers have never been sexy, but you would think that someone would find those numbers impressive. Besides me, I mean.
The company did jump up a bit prior to the earnings announcement so the drop isn't as bad as it would have been last week. Have you ever noticed how stock prices tend to move up a few days before good earnings are announced and down a few days before bad ones? Those reports are strictly confidential. Is the market telepathic?
General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> reported record earnings on Tuesday beating estimates even though earnings from automotive operations fell slightly from the same quarter last year. That doesn't bother me. I would rather see GM making money from its other divisions since the automotive industry is notoriously cyclical. Yes, the stock dropped.
Why? Perhaps it's the higher gas prices that could threaten GM's more profitable lines (the SUVs, mini-vans, and big trucks), or it could be the cyclical nature of the car and truck business that is keeping GM's price so low. With GM expected to earn $9.86 per share this year, its P/E is a ridiculously low 6! Cyclical companies are expected to do badly after a few years of good profits. So conventional wisdom has always said that you should buy a cyclical when its earnings are in the dumpsite and sell it when they are in the stratosphere. Our robust economy has kept GM in the high part of the cycle for years longer than usual so maybe the market is just waiting for the other shoe to drop.
Here's an alternative scenario. After a few more months/years of growing earnings, GM raises its dividend or, in an alternative version of the alternative scenario, starts buying up high tech companies with some of that cash that is just piling up in its coffers. Think that will wake the market up? My opinion is that as long as the economy remains strong, GM will continue to rake in the cash and eventually the market will lose its fear of a downturn (probably right before the next downturn!)
SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> isn't in our model portfolio, but it was on the Foolish Four list earlier this year. It reported flat earnings yesterday. Increased revenue was being spent on building out its network in anticipation of higher profit growth in the near future. The market didn't buy that one either and the stock dropped slightly.
Finally, Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> reported strong earnings this morning beating estimates by $0.06 per share, and, yes, the stock dropped slightly, at least in early morning trading. (Sears is still in some Foolish Four portfolios that were started last last year. Even though the stock was dropped from the Dow in November, the strategy calls for holding it until the renewal date.)
The stock hasn't recovered to the point where it first became a Foolish Four stock yet, but the company is certainly turning things around. Earnings per share (EPS) rose 29% compared to the second quarter of last year due to increased profits and the company's share buy-back program. (When the profits are spread over fewer shares outstanding, the EPS goes up even if the profits don't increase. If profits also increase, the increase is magnified if the number of shares outstanding has been reduced.)
Sears repurchased over 10 million shares during this last quarter, increasing the value of the remaining shares outstanding. The stock spiked up after the first quarter report indicated a turnaround was starting, and today's numbers confirmed that -- although the market didn't seem impressed. Which is understandable. This isn't all that impressive a report. Last year's numbers weren't exactly a high standard to beat. But companies this big don't turn on a dime. At least it's turning.
Fool on and prosper!