05/03/2012

Tom West
Head of Research
Columbia Management

While earnings reports are coming in ahead of consensus estimates this season, the "beats" seem to be driven more by pre-existing conservatism in estimates than by greater-than-expected strength in the economy. With a little more than half of the S&P 500 companies reporting, the majority of companies have reported earnings above consensus estimates. This has caused Wall Street analysts' full year 2012 earnings estimates to move up about 4% over the last several weeks. But this offsets a downward drift in earnings estimates of about 3% during the three months preceding the current reporting period. And while this inflection is welcome, it does not appear to indicate acceleration in the economy. Rather, it seems management teams and analysts used ample caution to allow for a slow U.S. economy, a potential slowdown in Europe and tougher comparisons from exchange rates weighing on the overseas earnings of U.S. based companies with significant non-us sales. That said, economic activity in the U.S. has held up. And many companies have been reporting that European sales held up well in the first quarter, more so in northern Europe than in the Mediterranean. 

With no economic rising tide to float all boats, industry and sector level trends, market share gains and losses, and individual firm operating performance becomes more visible and more important. This has definitely been the case this reporting period. In the technology sector, trends such as the shift to "the cloud", virtualization, networking and data storage are driving growth. Traditional enterprise spending is hanging in well but not growing outside the aforementioned or similar "fast currents." The consumer side of technology is weak…unless you are Apple (or sell lots of components to Apple), then it's very good. That is of course a simplification, but not too far from the mark. In financials, banks have reported continued improvement in credit, as well as some loan growth. Big capital markets players continue to see a choppy, low visibility environment in areas like trading and M&A advisory businesses. In branded consumer staples, volumes have generally been a disappointment. And while pricing is holding in, management teams are alluding to price pressure and indicating that selected price rollbacks might be necessary. Utilization in healthcare remains slow, but this is overshadowed by the higher-than-usual patent expirations of branded drugs and the share gains by generic drugs.

Tom West is head of equity research at Columbia Management Investment Advisers, LLC (CMIA). He joined the firm in 2003 and has been a member of the investment community since 2000.