Investors demand strong revenue growth
By Matt Krantz, USA TODAYIt’s not just about the bottom line during the ongoing earnings season, as investors are looking for companies that can do more than just cut costs.
With 100 companies in the Standard & Poor’s 500 index reporting their financial results so far, investors are paying keen attention to companies’ revenue growth and punishing many companies that disappoint, even if their profit comes in strong.
Shares of Yahoo fell 8.5% Wednesday after the Internet company posted 51% higher profit, but disappointed investors with 2% revenue growth. That comes after high-profile companies ranging from General Electric, IBM, Bank of America and Johnson & Johnson have all met or beat earnings estimates, but missed revenue projections, says John Butters of Thomson Reuters.
“It’s been pretty amazing how the market’s focus has changed to revenue,” says Dirk Van Dijk, strategist at Zacks Investment Research.
Investors are focused on companies’ revenue because it is a:
•Gauge of the economy’s strength. Investors are torn between whether the economy is sputtering or not, and revenue growth is a clean way to know, says Uri Landesman, president of Platinum Partners.
•Harbinger of companies’ futures. For companies like IBM, revenue can be an indication of what the future business will look like, says Tom Smith, stock analyst at S&P.
•Contrast against blow-out earnings. Only one company has posted disappointing revenue for every three that beat revenue expectations, Van Dijk says. Still, companies are only beating revenue forecasts by 1.2%, well below the 8.3% margin they’re beating earnings estimates.
•Sign cost cutting can only boost profit for so long. Investors are deciding companies can only cut expenses to a point before the company stalls, Van Dijk says.
Meanwhile, investors don’t like to see that revenue is expected to grow 9.1% in the second quarter, a deceleration from the 11.2% growth in the first quarter, Thomson Reuters says. Earnings are expected to grow 31.2%.
It’s still early, though, and despite some revenue shortfalls most companies continue to beat revenue and earnings forecasts, Butters says. So far, 65% of companies topped revenue forecasts, which is in line with recent quarters. Meanwhile, 76% of companies are beating earnings forecasts.
If that doesn’t continue, investors will be brutal. “The market has had no mercy for disappointments on the revenue front,” Van Dijk says.