Posted by
jillphillips on Thursday, July 23, 2009 12:18:27 AM
We are in the full swing of earnings
season, and the market is sorting through companies’ reports to find clues as to
the state of the economy. Our read has largely been that only those companies
that have significant operations in the developing nations are showing strength,
while many domestic companies are still having trouble. In other words, we think
that the American economy is not out of the woods yet. Today we’ll review two
companies that reported earnings yesterday: Coca-Cola (KO), a
multinational powerhouse, and Apple (AAPL), a predominantly
domestic company that has bucked the trend of weak consumer spending.
The world’s largest soft-drink maker,
Coca-Cola, reported earnings per share of 92 cents for the quarter (excluding
some items), outpacing analyst expectations of 89 cents, but down from
comparable numbers in the year-earlier period. Revenue shrunk 8.6 percent to
$8.27 billion from 9.05 billion in 2008, as foreign exchange fluctuations cut
into dollar-denominated sales – the company collects over 70 percent of its
revenues from outside the country. The volume of drinks sold worldwide rose 4
percent – not surprisingly led by huge gains in China and India with 14 and 33
percent increases, respectively. These developing world nations more than made
up for the 1 percent volume drop the company saw in the U.S. market. Chairman
& CEO Muhtar Kent was pleased with the developing market sales, but plans to
cut out more than $250 million in annual expenses, and possibly twice that by
2011 to free cash for additional marketing campaigns in that part of the
world.
While Coca-Cola relied on foreign
operations to buoy its business, consumer electronics powerhouse Apple was able
to grow earnings despite meager exposure to the developing world. The company
reported fiscal third-quarter profits last night that greatly exceeded
expectations and represented the company’s best non-holiday quarter
ever. Relying on sales of its iPhone (which the company has struggled to
maintain enough supply to meet demand) and less-expensive Mac notebook
computers, the company’s quarterly profit rose to $1.23 billion from $1.07
billion in the year earlier period. Sales, which rose 12 percent to $8.34
billion, combined with better than expected gross margins of 36 percent to
provide earnings of $1.35 per share compared to expectations of
$1.17.
Despite the blowout numbers, the company
did cite some relative weakness (or lack of growth) in education and business
markets which have been subject to budget constraints. However, given the added
speed and features of its new iPhone model, COO Tim Cook noted that the phone is
showing positive signs in corporate, government, and educational
sectors.
As per usual, the company’s forecasts were
short of analysts’ estimates. The company sees sales of $8.7 billion to $8.9
billion in the coming quarter, while earnings per share will be
$1.28-$1.23. Profit margins will likely come in some as the company touts
back-to-school promotions, and feels the effects of recent price cuts to its Mac
computer line. Regardless, both pricing measures will help Apple continue to
increase its market share – which now sits at 8.7 percent of the U.S. computer
market. The company has an astounding $31.1 billion of cash on its balance sheet
with no debt – an enviable position in the current climate. Shares have rallied
over 75 percent this year, but still only trade at a PEG of only 1.5. The
company has demonstrated a remarkable ability to grow a consumer-dependent
business in one of the harshest consumer environments of the last 80 years.