2011 Revenues May Surprise Investors: Analysts

This may turn out to be a much better year for corporate revenues than expected, although weak consumer demand and a depressed jobs market will continue to pose a challenge, some analysts say.


“A disconnect that currently exists between expectations for a double-digit earnings growth and a single-digit sales growth makes no sense”, argues Howard Silverblatt, senior index analyst at S&P, “and that can only mean that sales growth expectations are too low.”

In 2011, overall earnings for the S&P 500 are expected to increase 14.2 percent, according to analyst consensus compiled by . Sales, on the other hand, are expected to grow only 5.4 percent, according to the consensus.

Silverblatt’s current estimate for sales gains is more bullish at 9.1 percent (7.6 percent ex-financials), but even that is likely too low, he says. In a recent report, Goldman Sachs said it expects sales to grow 8 percent in 2011.

“If that is correct, it translates into more cost-cutting”, says Silverblatt. “But I doubt that any more significant cost cuts can be made.”

Silverblatt believes companies will start spending again. “They finally have opportunity to spend.”

"We think that the ability to defer hiring and still see real revenue gains may be largely behind us." -Chief Investment Strategist, Janney Montgomery Scott, Mark Luschini

The Energy and Technology/IT sectors may do particularly well in terms of revenue growth this year, according to Silverblatt. “With improving economy, companies are once again spending on technical needs, infrastructure, and software.”

Earnings results from technology heavyweights IBM and Apple this week appear to confirm a rebound in corporate spending on technology. And Intel, a bellwether for the sector, in its report last week said that it expected a big increase in capital spending. Some analysts see the announcement as a signal of the company’s confidence in future demand.

Mark Luschini, chief investment strategist at Janney Montgomery Scott agrees: “The majority of cuts to maintain profitability during the downturn have been implemented.” He believes the economic climate should allow companies to achieve profit forecasts through revenue increases, rather than cost-slashing. Luschini expects revenue growth of as much as 7 percent.

One potential sign that revenue growth will be more of a significant factor than cost-cutting in contributing to bottom line growth in 2011 is the projected decline in the number of S&P 500 companies expecting year-over-year revenue decreases and earnings increases.

According to FactSet Estimates, that number should drop to 31 companies versus 75 last year. In 2009, the year when drastic cost cuts drove a rebound in corporate profits, there were 115 such companies.

Forty-five percent or 14 companies on this year’s list are from the financial sector, according to the data. Eight of them are regional banks. Economic uncertainty and new banking regulations continue to put pressure on their traditional sources of revenue.

Analysts say revenues growth for the S&P 500 companies this year will come from stronger global growth and foreign sales, particularly in emerging markets. Currently, almost 50 percent of sales for the S&P 500 companies are generated abroad.

And although demand in the U.S. has been weak, recent retail sales data indicate that consumers are resilient and are spending again.

The payroll tax cut and jobless benefits extension should provide a slight boost to sales as well, notes Gina Sanchez, director of equity and asset allocation strategy for Roubini Global Economics. “It will be just enough to keep consumers from being overly focused on savings and deleveraging.”

The wealth effect from a rise in the stock market should also reinforce spending, albeit marginally, according to Sanchez. She expects sales growth to be close to the current consensus of 5 percent.

Some analysts believe that meaningful growth for companies might not come until they start adding workers.

“We think that the ability to defer hiring and still see real revenue gains may be largely behind us,” says Luschini.

Weak pace of growth in worker productivity last year is seen by many economists as a sign that companies will have to start bringing back their laid-off workers.

Although most analysts do not expect to see widespread hiring in 2011, they say increase in hiring and peaking productivity may dent margins, which are currently near all-time highs.

Goldman Sachs forecasts margin expansion of 8.8 percent this year. But it warns that rising costs of raw materials and food inflation could put downward pressure on margins for some companies as the cost of goods sold rises.