How To Read Earnings Reports

By Kevin Grewal, Editorial Director at www.SmartStops.net

Now that the second quarter of the year is over and earnings season is in full force, could the results of publicly traded companies indicate if we are on the road to an economic recovery?

Some believe so. After all, it is corporate America that drives the economic health of our nation and history has indicated that a recovery on Wall Street generally occurs before a recovery on Main Street. On the other hand, it appears that many companies have been implementing lean measures and merely cutting costs to survive as opposed to generating higher revenues and expanding business. At the end of the day, most believe that the two driving forces behind an economic recovery are numbers and consumer confidence.

Let’s take a look at some of the companies that have released earnings and see what they may indicate. Transportation giant CSX Corporation (CSX) beat Wall Street’s expectations, however showed a decline in second-quarter earnings of nearly 20%. This performance primarily came from cost cutting measures and not any increases in revenue. In fact, the nation’s third largest railroad stated that it expects shipping demand to sink by double digits in the upcoming quarter. The company has performed very well since witnessing a March low to gain 56% and close at $32.54 on July 13. In regards to the overall economy, this means that CSX doesn’t expect business to get any busier and suggests that the economy will continue to struggle.

Financial giant Goldman Sachs Group (GS) released earnings and smashed Wall Street’s expectations. The nation’s largest surviving investment bank reported earnings of $4.93/share as compared to the $3.49 anticipated by analysts. This jump in profits can be accounted for by strong trading results, improving markets and an upswing in advisory fees. The company’s stock has more than doubled to a July 13 close of $142.54 from its January low. So what does this mean for the overall health of the economy- the worst of the financial crisis could be behind us and investor confidence may be emerging indicating that the economy could be in rebound mode.

Low cost alternative, Family Dollar Stores (FDO) reported earnings 36% higher than a year ago and 5% better than Wall Street anticipated. The company’s stock has gained 14% from its March low to close at $30.12 on July 13. This is indicative that consumer confidence is still low and consumers are still wary of the future of the economy. The average consumer is still in cost cutting and saving mode, is reluctant to spring an extra dollar if he can avoid it, and is waiting desperately for more jobs to be created and fewer jobs to be slashed.

Diversified healthcare giant Johnson & Johnson (JNJ), up 24% from a March low to close at $57.72 on July 13, beat Wall Street’s expectations as well. However, the company reported a drop in second quarter earnings by 5% to $1.15/share. JNJ stated that the decline in earnings was primarily caused by a drop in demand for their products which resulted in lower revenues. On the positive side, consumer sales were relatively strong indicating that there may be some life left in the economy.

As companies continue to beat Wall Street’s expectations, investor confidence should start to increase and this confidence should trickle down to the consumer. Additionally, as profits continue to remain healthy, corporations will have the ability to hire more employees and expand operations. In a nutshell, it seems like we are heading in the right direction, but we won’t be in the clear until consumers are confident in the economy and start spending a bit more and employers start increasing and not decreasing their work forces.

Keep in mind, if you want to play the earnings game, that they come with risks. An excellent way to mitigate these risks is to have and implement an exit strategy. According to the latest data from www.SmartStops.net here are the price levels where the uptrend of these stocks would be over: CSX at $29.36; GS at $140.67; FDO at $28.74; JNJ at $54.62. These levels change daily and updated data is free at www.SmartStops.net.