Not All Earnings News Is Bad

We are in such a negative/bearish environment and it seems like all the economic news, including individual company earnings news, is bad these days. But it's always worth noting the exceptions to the rule and thinking about why that is.

Yesterday IBM announced it's fourth quarter earnings and it's net income was up 12% over the fourth quarter of 2007. Revenues were down slightly as hardware was down 20% and higher margin software and services were up a similar amount. But most interesting was IBM's move to increase the expectations for earnings in 2009 and 2010. IBM said that the company "was ahead of pace to increase earnings to $10 to $11/share by 2010".

What's going on at IBM is an ongoing transition from a hardware oriented business to a software and services business which is driving margins up combined with a still healthy book of business from its clients all over the world combined with an ongoing ability to reduce costs and become more efficient.

And also yesterday, I saw a report from Jeffries and Company that said this about Google:  

Positive ad-coverage and acceleration in paid clicks growth in
   Oct/Nov/Dec. give us more confidence in Google's ability to meet our
   and consensus 4Q estimates despite the severe ad climate. We reiterate
   our Buy based on ad budget migration to Search, Google's relatively
   resilient model and its newfound cost discipline.

   comScore released ad-coverage data for December after market close
   yesterday, which we use to derive Y/Y paid clicks growth.

As we've discussed on this blog recently, Google has the ability to drive paid clicks (which is what generates revenue for Google) in a number of ways, including by increasing ads per page and total ad views, and they may well be doing exactly that.

Moving away from tech and internet, there's Abbott Labs which just announced "double digit sales and earnings growth in the fourth quarter". This is largely a new products story around stents and a new arthritis drug.

I found all of this good earnings news (the Google info is not actual, just projected) in about ten minutes this morning and I am sure there is a lot more out there.

We are in a bad economy for sure and many sectors like banks, financial services of all kinds, real estate, oil and gas, automotive, etc, etc are hurting big time.

But there are companies that are doing well in this environment, including many small companies like the ones we have in our portfolio. You have to be very careful investing in this environment and must understand what the companies you invest in do, you must make sure their balance sheets are strong and the can self finance, and you must look for businesses that are "recession proof" in one way or another. My point is simply that they are out there and you don't have to look that hard to find them.

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Comments (Archived):

  1. fredwilson

    Yup. And trade at 10-16x net income

  2. fredwilson

    Not sure. What do you think?

  3. fredwilson

    I am a non participant too guys! Maybe I need to change the name of this blog. We can call it 😉

  4. andyswan

    In the darkest skies, the STARS shine brightest!

  5. andyswan

    Exactly. The best remedy for a recession is to refuse to participate.I’m sure that’s not a popular notion in our newly soft victim-society….but it’ll work for me!

  6. Jonathan W Smith

    How does this relate to the Twitter spike yesterday as the 44 was sworn in? What do ants know about building a nest?

  7. gregorylent

    what else is a recession but a mental event wherein almost everybody is saying things are bad? amusing world we create for ourselves ..

    1. awatterson

      A recession can be real if it’s a retreat from false value and asset bubbles. The recession you describe only occurs when assets are being undervalued, a hard argument to make given the fundamentals that led to this downturn.

      1. gregorylent

        agree with your terms …. and, as macro-wide as we can take our vision, re-valuation is the best name to describe the next few years … all the way to “what does it mean to be a human being” .. not exactly a subject for economists ..

        1. awatterson

          Hah. Right on, Economists are too dismal. Best leave those questions to the Philosophers.I like the “Re-Valuation”Term.

  8. Zach Heller

    It is always good to point out the companies that seem to stand out in a bad climate. Negativity has spread far and wide, but it does not have to be the only news of the day.Thank you.

  9. Michael J. Pratt

    1. Andy is right BUT, keep in mind that many negative effects take multiple quarters to manifest themselves in business downstream when an economy has structural issues to the extent that we do now. I am not a doomsday scenario guy but the over extension of credit to all parts of the economy phase of our lives is over, in many places for good, and that is a good thing. The problem is that many industries were able to experience abnormal double digit growth year after year because of the demand created by the leverage. That’s gone now and it will take quite a bit of time to adjust all the businesses to that reality.The bottom line to successful portfolio construction is to determine who is least negatively affected by this. Easier said than done.

  10. gruvr music map

    someone should construct a market index that calculates ratio of positive to negative posts or tweets regarding the economy… I remember a distinct turning point where you started to hear negative blips amidst wholly optimistic news, over a year ago… early warning signs.On another note, ANimal COllective to be interviewed on NPR today

  11. kidmercury

    we were doing so well here at AVC for a while, let’s not let the obamaganda sway our good senses. lots of bad news still on the way. dollar devaluation baked in. geopolitical tension. markets still rife with corruption. people still think a guy in a cave pulled off 9/11.sorry bulls, you had your fun with your inflationary asset bubbles created by your hero alan greenspan. but now the party’s over, and us bears have come to make you pay the price. you can ask big govt to print more money and inflate your values, but be careful what you wish’s good to be a bear,kid mercury

    1. fredwilson

      this blog will be neither bull nor bear i hope

  12. Lala Ram Lal

    I think we must stop worrying too much about macro and take a deep look at micro-economics behind the business under consideration. More often than not – If micro economics is strong, macro would not make too much of a difference if the company is small and focused on what it does.

  13. Possible Jackass?

    Fred, I love reading your blog! But listen, you’re killing me slowly with the it’s/its thing the last few posts. How I remember it: first choose between “its” and “it is”. Only one will make sense in your sentence. Then shorten “it is” into “it’s” if you feel like some apostrophe action.Back to your post – last night AAPL also shattered analysts’ estimates for sales and profit. There’s not as much easy money lying around, but companies with innovative products will do just fine.

    1. fredwilson

      I need user based editing badly!!

  14. Chris Dodge

    Now that they both have announced quarterly results, what a difference between Apple and Microsoft! This could be the beginning of Apple’s “hockey stick” moment in terms of market share of iPhone and Macs? I hope they can sustain it. I bet AAPL will eventually make a very strong push into the Corporate/Enterprise market within the next few years – that will be their next growth market. Until Windows 7 comes out – which is getting strong reviews so far – Apple has an opportunity to keep gaining market share.I’m turning into such an Apple fanboy now. I’d better keep cracking away on Objective-C/Cocoa. Are you still sticking with Android?Also interesting about IBM’s stunning results. It’s an interesting contrast of corporate cultures between AAPL and IBM – IBM doesn’t come to mind as in the same innovator class as Apple – but I guess IBM’s emphasis into SW products and services are keeping them afloat these days with those better margins.

  15. Mike

    Unfortunately even with IBM’s good news the other day, today we get word of layoffs happening.…Excerpt below, link requires WSJ Online membership.IBM Employees Report Job CutsInternational Business Machines Corp. employees have informed Alliance@IBM, an affiliate of the Communication Workers of America, that workers at a number of locations have been told their jobs are being eliminated.Lee Conrad, national coordinator for Alliance, said that he has received a number of reports of people being informed that they are subject to what IBM calls a “resource action.” He said that the reports are coming from people who work for the software group in applications development and marketing, among other functions.

  16. MartinEdic

    And now we have aapl beating the street estimates by 22% eps on GAAP numbers and by 50% on non-GAAP numbers. $28 billion in cash. What do they do with that?

    1. fredwilson

      Yes, I posted a bit about that today