If there's any good news about the economy, it's the startling surge in corporate earnings. In the most recent quarter, about 80 percent of S&P 500 firms reported profits greater than Wall Street analysts expected, according to Thomson Reuters. That's the highest proportion of upside surprises since Thomson Reuters started tracking the data in 1994.
One obvious reason for the overperformance is that the computer models analysts use to predict earnings have been thrown out of whack by the turbulent economy. Investors have also underestimated companies' ability to cut costs and streamline, one reason profits have risen at many companies even as overall sales have fallen. As Wall Street adjusts and raises its expectations, future earnings will probably be more predictable. Still, the latest numbers are a sign that many companies are healthy, which is essential for hiring to pick up and a real recovery to take root.
There are laggards, of course, and their woes highlight some of the areas where the economy remains weakest. About 14 percent of big companies performed worse than expected in the latest quarter. To determine who's falling behind, I analyzed data provided by Thomson Reuters on 60-odd companies whose most recent earnings fell below consensus Wall Street estimates. Some of these letdown companies are making money, just not as much as Wall Street thinks they should. Others are bleeding cash and taking longer than expected to turn themselves around. Overall, these firms provide a sketch of how consumers and businesses alike are changing their spending habits and retrenching. Here are 10 of the most prominent underperformers in corporate America:
Bank of America. Some financial firms, like JPMorgan Chase and Goldman Sachs, have been raking in cash, with an increased share of Wall Street business following the collapse of Lehman Brothers and Bear Stearns. But Bank of America and its new investment banking division, Merrill Lynch, are sitting out the party. B of A lost a cool $1 billion in the third quarter, mainly because of losses on mortgages, home equity loans, credit cards, and commercial loans. The bank still has to pay back $45 billion in federal bailout money while dealing with onerous government restrictions on pay and other matters. No wonder it's taking awhile to find a replacement for CEO Ken Lewis, who's leaving at the end of the year.
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Best Buy. Revenue and market share have gone up since Circuit City, a top competitor, went out of business earlier this year. But that hasn't completely offset spending cutbacks by strapped consumers. Some of the products on Best Buy shelves have held up OK, such as phones, notebook computers, and flat-screen TVs. But sales of gaming systems, digital cameras, music, and movies have fallen as shoppers worry about rising unemployment and a shaky recovery. New stores have helped prime an increase in revenue this year, but profit and same-store sales have fallen.
Boeing. The new 787 Dreamliner is more than two years behind schedule, prompting several airlines to cancel orders, and there have been delays getting a revamped 747 off the ground, too. Those problems added up to a $1.6 billion third-quarter loss for this aerospace giant. Commercial jet orders seem unlikely to pick up until the global economy strengthens, which might not be until the 787's delayed debut, now scheduled for late next year. Boeing's defense business has been steady, but that could also change as the Obama administration starts to look for big spending cuts to help narrow the gaping federal deficit.
Eastman Kodak. This photography pioneer has been trying to reinvent itself for the digital age, but so far its plan hasn't clicked. Kodak has gotten some traction from new products, like photo-quality printers, while drastically cutting costs and laying off workers. But camera sales have plunged industrywide, and 2009 marks the year the company stopped selling Kodachrome film, a signature product. Sales are off 28 percent this year, and Kodak has lost money for four straight quarters. The company expects results to improve during the holiday season, a critical selling period that will reveal whether a turnaround is coming into focus.
E-Trade. Online banks can lose money just like conventional lenders, and this Web pioneer has been hammered by mortgage losses related to the housing bust. E-Trade is now in its third year of steep losses, with more pain to come. The portion of bum loans in the company's portfolio has declined slightly, but it's still sky-high and unlikely to return to normal levels until jobs return, foreclosures decline, and the housing market recovers (whenever that is). If not for billions in bad loans, E-Trade would be on a roll: Its brokerage business is at a record high, thanks to the recent stock market run-up.
Harley-Davidson. Hogs are vulnerable to recession too, with sales at this legendary motorcycle maker down about 17 percent so far this year. The finance unit has especially suffered, as Harley owners struggle to repay their loans, just like car and home owners. A turnaround plan calls for selling the company's MV Agusta unit and closing the Buell division, which would offload two trendy sport-bike manufacturers that Harley acquired just a few years ago. The company is still profitable, but just barely, and may close its York, Pa., plant and make further cutbacks.
Lennar Corp. The housing market is even worse than Wall Street seems to believe, with home builders reeling from one of the worst housing busts in American history. Revenue at Lennar is down 35 percent from last year, with losses since 2007 totaling more than $4 billion. The stock has fallen 79 percent from its peak in the summer of 2005. A recent uptick in monthly orders suggests the worst may be over, with home builders helped by government subsidies for home buyers. But foreclosure rates are still near record highs, and rising unemployment means there's more pain to come. Competitors like Pulte Homes and KB Home are also struggling.
Lorillard. Cigarette companies are resilient, surviving relentless assaults on their business over the years. But Lorillard disappointed investors recently with news that it's not completely recessionproof. The company has earned a robust $706 million so far in 2009—a 12 percent boost over last year's earnings—but those numbers are lower than expected because of a 7.5 percent decline in sales of Newport, Kent, and other full-price brands. Smokers, it turns out, have been saving money by switching to discount cigarettes, which has fueled a 55 percent increase in sales of Lorillard's main value brand, Maverick. The problem is that the company earns a lot more on a pack of Newports than a pack of Mavericks, so investors are worried that strapped smokers could get permanently addicted to the cheaper cigarettes.
Sunoco. Nobody who remembers $4 gas is going to feel sorry for an energy company, but this fuel refiner and retailer has struggled as people have traveled less and demand for gasoline has tanked. Revenue has plunged 47 percent so far in 2009, and the company has lost $256 million. Sunoco is more vulnerable to a downturn than competitors because its refineries are concentrated in the northeastern United States, which limits flexibility. The company has closed one refinery to rein in oversupply, but it still expects a rocky road ahead.
Zions Bancorporation. This regional bank, based in Utah, has lost money for four straight quarters, and the red ink is likely to keep spilling. Zions' branches are concentrated in hard-hit states like Nevada, California, and Arizona, one reason losses on mortgages, credit cards, and other consumer loans are still going up. To free up more cash to cover future losses, Zions has cut its quarterly dividend from 32 cents per share a year ago to a single penny. And Zions still has to repay $1.4 billion in TARP bailout funds from the federal government, with no payback date set so far.
Corrected on 11/12/2009: A previous version of this story incorrectly indicated the year that Circuit City was liquidated. The company was liquidated in 2009.