Top Gun FP Client Note: Impressive 4th Quarter Earnings

| | |
NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a 24-48 hour delay from time to time.  Here is this week’s.
Client: What would it take for you to change your view?
Me: Revenue growth.
Conversation, December 2009
After reviewing 4th quarter earnings, the conclusion is undeniable: there has been a surge in business activity over the last six months which is reflected in companies top and bottom lines.
Take a look at the following data for the S&P 500 as a whole:
Period             Operating EPS
4Q09 (88%)*        $17.34
3Q09                     $15.78
2Q09                     $13.81
1Q09                     $10.11
4Q08                    -$00.09
3Q08                     $15.96
2Q08                     $17.02
1Q08                     $16.62
4Q07                     $15.22
3Q07                     $20.87
2Q07                     $24.06
1Q07                     $22.39
Now take a look at the data from an index I created of four of the biggest tech companies in the world (Hewlett Packard, Intel, Cisco, EMC) with a combined market cap in excess of $400 billion:

Big Tech Index

Period Revenues** % Change Net
% Change
4Q 2009 $45,046 14.1% $8,795 56.3%
3Q 2009 $41,875 -11.5% $7,216 -5.2%
2Q 2009 $37,112 -17.2% $5,486 -17.9%
1Q 2009 $35,494 -20.5% $4,827 -25.1%
4Q 2008 $39,477 -15.2% $5,627 -26.1%
3Q 2008 $47,314 18.6% $7,615 7.7%
2Q 2008 $44,798 23.9% $6,678 13.4%
1Q 2008 $44,656 24.6% $6,441 6.9%
4Q 2007 $46,564 28.2% $7,609 28.4%
3Q 2007 $39,884 16.8% $7,074 28.2%
2Q 2007 $36,152 16.4% $5,889  
1Q 2007 $35,830 12.3% $6,026  
4Q 2006 $36,314   $5,926  
3Q 2006 $34,145   $5,517  
2Q 2006 $31,069      
1Q 2006 $31,908      
* 88% of S&P 500 companies reported through 2/17, the time this data was updated.
** Revenues excludes HP Services and some very small items from HP Personal Systems
Revenues for the big four tech companies are again showing year over year gains after nasty declines for the previous four quarters.  Likewise for net income which is up 56.3% year over year and 82% from the 1Q09 trough. 
While less pronounced, operating earnings for the S&P 500 as a whole support the trend: companies sold more and earned more in the latter half of 2009.  There has been a significant bounce off the bottom.
We saw the same thing in the second half of 2003 with revenues and earnings picking up in the wake of the March 2003 low and all the monetary and fiscal stimulus.  The analogy to 2003-04 that I talked about two weeks ago continues to impress me.
While 4th quarter earnings have been impressive, the question remains how much of it was driven by unprecedented government stimulus.  0% Fed Funds Rate, $700 billion TARP, $1.25 trillion in agency MBS purchases, the $787 billion stimulus; all of this has clearly flushed the economy and financial markets with cash and jump started economic activity.
But now government officials are talking exit strategies.  The Fed tested the waters on Thursday by increasing the discount rate by 1/2 a percent.  Many of the Fed’s special programs expired on February 1 and the MBS purchase program ends on March 31.  Obama is talking about a deficit reduction committee.  (However toothless such talk might be, the fact that he is talking about it is important as an insight into the current mindset).
Without all this stimulus can the economy stand on its own?
The late January/early February selloff can be interpreted as a response to these issues.  {That selloff was on heavy volume and hit the riskiest, best performing assets, hardest.  The bounce the last two weeks has been on light volume and the riskiest assets have underperformed).
For now, it looks like we are in a range as life support is gradually reduced and it is hoped that the nascent recovery can stand on its own two feet.

YTD Returns (through 2/19)
S&P: -0.53%
DJ Total: +0.02%
Top Gun: +0.61%
Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay CA 95746
(916) 224-0113

Similar Posts