Earnings Season Upon Us

Fourth-quarter earnings season kicks into full gear this week, with 38 S&P 500 companies reporting earnings. Led by growth in the financial sector, earnings are expected to increase 1.9% over the fourth quarter of 2011. Strong financial company results are expected to be offset by sluggish growth for industrial companies, as the recession in Europe and slowdown in Asia take a toll. In fact, there have been 101 negative earnings pre-announcements versus 32 positive preannouncements to date, which has tempered investor expectations. As we analyze earnings reports, we will be watching closely for a few key trends: 1. How are companies using excess cash (increased stock repurchases and dividends are credit negatives), and 2. How are companies accessing cash held overseas. We learned from Hewlett Packard’s most recent 10k filing that the company is entering into intercompany loans with its overseas subsidiaries as a way to access foreign cash without paying taxes. As billions of dollars of corporate cash is held outside the US, how corporations access this cash and what they do with it are key questions when assessing overall credit quality.