U.S. ‘Snapback’ Drives Profits

Companies are beating earnings estimates at the highest rate in two years.

U.S. companies from Apple Inc. to 3M Co. are surpassing earnings estimates at the highest rate in two years as economic growth at home helps drive demand and counter a drag from Europe.

Profit has outpaced forecasts for 82 percent of Standard & Poor’s 500 Index companies that have reported so far this earnings cycle, which if it holds would be the highest rate since the first quarter of 2010. Earnings rose 12 percent on average through yesterday, exceeding the 0.6 percent increase analysts projected when reporting began in earnest on April 10, according to data compiled by Bloomberg.

“The domestic economy is faring far better than people thought and that, even in the face of Europe and the slowdown in the emerging world, is blowing away estimates,” said Jim Paulsen, chief investment strategist for Well Capital Management, which oversees about $333 billion.

Profits running ahead of forecasts may help ease investor concern that a shrinking economy in Europe and slower growth in China will weigh down earnings this year.

Eaton Corp., the Cleveland-based producer of circuit breakers and truck parts, beat earnings projections as construction and vehicle sales rebounded, said Chief Executive Officer Sandy Cutler in an interview.

“What we’ve seen is a pretty good snapback,” Cutler said, referring to U.S. economic growth since the financial crisis of 2008. “The industrial side of the economy had a very difficult downturn.”

All 10 industry groups in the S&P 500 delivered better- than-expected results, with financial, materials and technology companies leading with a positive rate of more than 11 percent, according to data compiled by Bloomberg. So far 145 companies have reported earnings.

Apple, the world’s largest company by market value, helped drive the earnings growth rate for S&P companies that have reported to 12 percent yesterday from 6.5 percent the previous day. The company yesterday said its fiscal second-quarter profit almost doubled to $11.6 billion, reflecting demand for the iPhone in China and purchases of a new version of the iPad. Earnings per share outstripped estimates by 23 percent.

Among other technology bellwethers, Microsoft Corp., the largest software maker, last week reported higher-than-expected corporate purchases of computers, while Texas Instruments Inc., the biggest maker of analog chips, earlier this week indicated robust demand for a range of electronics.

 

‘Operational Discipline’

3M, the maker of Post-it Notes and fuel system tuneup kits, posted earnings per share that beat analysts’ estimates by 10 cents, helped by rising domestic auto and industrial demand.

“The Americas were strong,” Chief Executive Officer Inge Thulin said yesterday. “Asia-Pacific was somewhat slower and Western Europe held its own with very good operational discipline.”

Honeywell International Inc., maker of products from flight controls to work boots, raised its 2012 forecast after posting quarterly profit that beat analysts’ estimates on demand for aircraft parts and energy technology. General Electric Co. beat earnings per share predictions by a cent.

U.S. retail sales, vehicle purchases and even housing starts have helped drive the economy and earnings, according to Paulsen, based in Minneapolis, Minnesota.

The U.S economy may expand 2.3 percent this year, up from 1.7 percent in 2011, according to the median of 74 estimates compiled by Bloomberg. The euro area is forecast to shrink 0.4 percent and China’s growth is expected to slow to 8.4 percent.

The S&P 500 Index has gained 9.1 percent since the end of 2011. It gained 12 percent in the first three months of 2012, the biggest first-quarter gain since 1998.

Companies had tamped down expectations because of the difficulty in predicting how sales would be affected by budget cuts in Europe and a Chinese economy that posted its slowest pace of growth in 11 quarters, said investors, including David Sowerby, a Bloomfield Hills, Michigan-based portfolio manager at Loomis Sayles & Co.

“What we’re seeing in the first quarter is inordinately high,” Sowerby, whose firm oversees about $160 billion, said in a telephone interview. “That’s primarily a reflection that companies have been more conservative in their guidance.”

With about a third of companies reporting, Paulsen said he’s optimistic earnings will maintain their positive track.

“A legacy of the great 2008 crisis is that it’s left us feeling that things just can’t be this good.”


 

Bloomberg News

 

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