Published October 26, 2012
NEW YORK – For many U.S. companies, the earnings period has been scary enough. For those with big overseas operations, it has been a horror show.
Corporate America overall is struggling, with year-over-year earnings expected to decline for the first time in three years. But in a big switch from last year, a high proportion of overseas business is no longer a ticket to big earnings - and, in fact, has been a hindrance.
"It's how the worm turns," said Uri Landesman, president at Platinum Partners in New York. "Right now, the U.S. is not super-exciting, but relatively speaking, it's doing well. Anybody who is doing a lot of business overseas, things are slow."
The slowed growth overseas, particularly in Europe, has hurt U.S. companies' sales. The U.S. economy is growing at a middling 2 percent at an annual rate that compares favorably with the 17-nation euro zone, which is expected to have fallen into recession in the third quarter.
A Thomson Reuters analysis of third-quarter earnings shows a big difference in results between U.S. companies with the most international sales and those with the least.
A basket of 39 S&P 500 companies among those having the highest percentage of sales from overseas are expected to see earnings decline 8.5 percent from a year ago. That's based on actual results from 24 companies and estimates for the rest, according to the Thomson Reuters data.
Meanwhile, earnings for companies in a basket of 38 S&P 500 among those with the lowest overseas sales, including Southwest Airlines and UnitedHealth Group , now show an increase of 11.1 percent from a year ago. That's based on actual results from 15 companies and estimates for the rest.
Overall, the earnings of Standard & Poor's 500 companies are expected to decline 1.2 percent in the third quarter.
The disparity has emerged as S&P 500 companies suffer through their worst earnings season in three years. Just 37 percent of the 272 companies that have reported so far have exceeded revenue expectations - far short of the long-term average of 62 percent. By comparison, about 63 percent have exceeded earnings forecasts, just above the long-term average.
That so many companies are falling short on revenues suggests cost-cutting will eventually run its course. A rebound in revenue in the fourth quarter "may be at risk in the absence of some improvement," Greg Harrison, Thomson Reuters corporate earnings research analyst, wrote on Friday.
It gets worse. So far there have been 37 earnings warnings for the fourth quarter and just 4 positive announcements - the worst ratio since Thomson Reuters started keeping data in 1996.
"The tone has gone from cautious in July to ultra-cautious in November," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
About 47 percent of S&P 500 sales come from abroad and a little over 14 percent from Europe, according to S&P data.
Europe has been repeatedly cited by companies as a reason for weak third-quarter results. Among the latest was Coca-Cola Enterprises , which said on Thursday weakness in Europe hurt results and said it was restructuring parts of its finance and sales operations.
Technology companies account for the bulk of the 39 companies with the most international sales. Among those that have already reported is International Business Machines which earlier this month posted a quarterly revenue miss and barely beat analyst expectations for earnings.
Like IBM, the biggest disappointments this reporting period have been on the revenue side. S&P 500 companies' revenue for the third quarter is expected to slip 0.6 percent from a year ago, Thomson Reuters data showed.
But for those 39 companies with the most international exposure, revenue is seen down 10.8 percent from a year ago. For the companies with the least, it's seen up 2.7 percent.
Smaller-capitalization companies are showing a similar profile.
"We have noticed that so far, small cap companies that are missing on revenues tend to have some international exposure (median international exposure of about 10 percent), while those who are beating on revenues tend to have domestic revenue biases," Credit Suisse analysts wrote in a research note this week.
(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)