Tickers in this Article: COH, TWX, F, WHR, TWC
With 60% of the S&P 500's companies having posted second-quarter results, we can start to draw some conclusions on a sector-by-sector basis. One of them isn't a surprise ... technology stocks rock! Year-over-year, tech earnings have improved by nearly 28%. And, thanks to surging commodity prices, double-digit earnings increases for the energy and materials sectors aren't shocking either.

TUTORIAL: Stock Basics

But there's a noteworthy laggard, and it's a sector few would have expected to be at the bottom of the Q2 pile after so many of them did so well in Q1. Numbers don't lie though - the consumer discretionary sector is reporting the worst results of all for last quarter's earnings season, and serving up more than its fair share of 'misses'.

Perhaps the tepidness of the economic recovery truly is taking a toll on individuals.

Just the Facts
So far, with 39 of the 79 consumer discretionary names having reported last quarter's results, the average year-over-year bottom line improvement is a paltry 1.6% - the worst among the S&P 500's 10 major sectors.

No, Ford Motors' (NYSE:F) earnings dip from 68 cents a year ago to this year's 65 cents per share didn't help on this front, but at least the market saw it coming (Ford at least topped earnings estimates of 60 cents per share). For consumer durables and apparel names, not only has the group seen a dip in earnings, but these slumps caught investors off guard; two of the eight that have reported so far, including Whirlpool (NYSE:WHR), actually missed estimates in addition to posting small bottom lines.

All told, the autos and auto components companies in the S&P 500 have posted an average income year-over-year decline of 10.6%, while the apparel and consumer durable manufacturers have let Q2 earnings slip 5.8%. It doesn't exactly scream "recovery!"

That's not to say there haven't been bright sports for the consumer discretionary sector - there have been.

The consumer services industry, for instance, has pumped up its Q2 bottom lines by 13.3%, while the media group of all sectors has seen all five of its stocks in the S&P 500 top estimates, and increase income by 12.3%. But even then, some of the strong results are tainted.

As an example, Time Warner Cable (NYSE:TWC) managed to improve its Q2 per-share income by 22%. Yet, revenue was only 4% higher, and we learned the same day the company lost (net) subscribers to less expensive packages being offered by the competition. That's not a step in a positive direction for Time Warner.

The retailing segment of the consumer discretionary sector has been so-so, with a 10.2% increase in second-quarter profits and a descent average beat/miss ratio. For the sake of comparison though, the market' average earnings increase for Q2 so far is 19.8%.

The Fat Lady Hasn't Sung ... Yet
It may be a tad early to assume the worst yet. We've got Coach (NYSE:COH) - a habitual overachiever when it comes to earnings - on Tuesday. Perhaps it will help beef up the numbers by topping the expected per-share profit of 65 cents. Time Warner (NYSE:TWX), the movie and print-media sibling to Time Warner Cable, will post last quarter's results on Wednesday. It too habitually tops earnings estimates, and the sector desperately needs it too this time around.

On the other hand, with more than half of these discretionary names having posted Q2 numbers already, even something encouraging from Time Warner or Coach won't really redeem the group. If either or both fall short though, that may drive the nail in the coffin.

The Bottom Line
Perhaps consumers are running out of emotional as well as monetary gas after all. And, it's a red flag to be sure - consumer spending ultimately fuels 66% of GDP. (These decision-making tools play an integral role in corporate finance and economic forecasting. Refer to Using Decision Trees In Finance.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center