Corporate Earnings: Looking Under The Hood

Corporate Earnings: Looking Under The Hood

Pacifica Partners’ Financial Post Weekly Column – Oct 22nd 2009


This month has seen perhaps the most eagerly anticipated set of quarterly earnings announcements by investors around the world. After the run up that the markets have enjoyed this year, many are wondering if corporations will be able to vindicate the markets’ optimism.

The big US banks have all reported how they fared during the quarter. The common theme seemed to be that their traditional banking operations had to set aside more reserves than expected to cushion against loan losses. This reflects rising default rates. At the same time, the investment banking and market related parts of the banks reported very strong earnings.

Bank Losses

Once the dust settled, the markets have seemed to take a little more cautious approach to the banks. The market realizes that part of the reason the banks have been this profitable is that they have received a lot of government support. Most of the banks have come under some selling pressure since their respective earnings announcements. It seemed to be a case of companies delivering earnings that were “better than expected” but the devil was in the details.

At this point, as we see more and more companies reporting how they are faring in this economy, one signpost to assess this will be whether or not they are able to grow their revenues and not just be relying on cost cutting. After all, costs can only be cut so far. Some companies so far have been able to report rising revenues and have raised their guidance for the next year. However, even these companies have not been able to sustain a rise in their share prices. Just like the banks, after an initial jump in enthusiasm, these companies also came under selling pressure once investors had a chance to “look under the hood” of these announcements.

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Pacifica Partners are weekly columnists for the Financial Post

Legal Disclaimer

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

Copyright (C) 2009 Pacifica Partners Inc. All rights reserved.

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