Despite a terrible economic backdrop, the companies held in the Essential Growth Portfolio(SM) did surprisingly well in their recent earnings reports. Of the forty companies that reported earnings while they were held in the Essential Growth Portfolio(SM) during the second quarter, 29 (72.5%) beat the consensus earnings estimates prevailing prior to the report.
Another seven companies (17.5%) met consensus estimates for quarterly earnings. Only four companies (10%) failed to meet estimates for quarterly earnings.
It is important to point out that analysts’ expectations have been marked down pretty significantly over the last several months. However, many of our companies faced substantial headwinds as much discretionary spending by businesses and consumers was put on hold in the first quarter of 2009. In addition, the U.S. dollar gained against many foreign currencies during the first quarter, meaning that non-U.S. sales were worth less when translated into dollars for financial reporting purposes.
Finally, the key to short term earnings success was cost-cutting. Companies slashed discretionary spending and headcount in order to bring expenses in line with lower revenues. While these reductions continue to show up in the monthly reports of job losses, the good news is that companies have become much more efficient, making it possible that earnings may recover more quickly once revenues begin to grow.