Building on Current Earnings Foundation, Analysts Project Future Growth

Thursday, May 20, 2010

Over the past year, corporate earnings for larger companies have benefited primarily from three factors:

  1. Strategic company moves to cut costs and increase productivity
  2. An economic turnaround from negative to positive conditions
  3. Financial improvements, including shored up markets, support for troubled companies (especially financials) and access to low-cost funds for untroubled firms

These items have allowed building the current foundation of earnings. So, what’s next?

As these drivers play out, future earnings growth will be fostered by these three factors:

  1. Economic growth, including a return of pricing power
  2. A return to “normal” (this is in addition to the underlying economic growth and represents both an undoing of stringent cost measures and a release of pent-up demand)
  3. Strategic growth and competitive moves (e.g., research and development, expansion and acquisition)

Here are the analysts’ future growth rates, both the current to next year forecast change and the longer, five-year outlook.

With no signs of over-optimism in the analysts’ forecasts (see yesterday’s write-up, “DJIA Earnings Reports Are In – No Sign of Over-Optimism”), we can accept these projections as sound estimates based on reasonable assumptions – perhaps even conservative given the continuing feelings of uncertainty. Importantly, though, each of the three factors driving future growth has the ability to show unexpected force and speed. Therefore, the forecasts are not limiting – “positive surprises” are possible.

So… Current earnings estimates and forecast growth rates can be taken as acceptable for valuation purposes. Tomorrow, we will take a look at the current valuations.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

May 2010