Looking for Clues in Q2 Earnings Calls
After a rough second quarter, corporate financial results will be weak. Investors will be listening closely to executives for signs of hope in the future

By Ben Steverman  July 9, 2009


Entering the crucial midyear earnings season, investors are a befuddled bunch.
Financial markets—much improved from four months ago—suggest the economy is stabilizing and could recover soon. But corporate profits continue to fall, and more and more Americans are losing their jobs.

That’s why, investors say, they’ll be listening very closely as companies unveil second-quarter results—and not just to the results themselves, but to what executives say about the future.

“What the market wants to hear out of Corporate America is that perhaps things are getting better,” says Peter Cardillo, chief market economist at Avalon Partners. “Is the mood shifting toward a more positive outlook?”

Not a Great Start

Alcoa (AA), traditionally the first major U.S. concern to release results each quarter, said July 8 that earnings fell from 67¢ per share a year ago to a loss of 32¢ last quarter. Revenue dropped 41%.

There’s certainly nothing to celebrate in those results, but attentive investors could detect a slight shift in tone.
In a July 8 call with analysts, Alcoa Chief Executive Klaus Kleinfeld described how the giant aluminum producer is first in the supply chain of a number of industries. “So, we see some changes … at an early point in time,” he said.

Thus, Alcoa sees “early signs of a cyclical downturn” in aerospace, he said. But there is some hope in the automotive, heavy trucks and trailers, and beverage cans industries.

“So overall, the global environment for 2009 clearly remains challenging, but I believe we do see some pockets of growth—like in China—and signs of stabilization in the U.S. in automotive and beverage cans in general,” Kleinfeld said.

It’s not just big companies that can be economic barometers.
Another early reporter is WD-40 (WDFC), the maker of a wide variety of lubricants and cleaning products. Talking to analysts on July 8, WD-40 Chief Executive Garry Ridge gave his view: “We … anticipate that the U.S. economy will recover slowly as many international markets experience a continued economic slowdown,” he said.

Reports Add Up to Data
One by one, these reports may help investors settle the debate about whether, and how quickly, the economy can recover.

“Each one of these reports is a data point that tells you what at least that executive in that industry sees in the near term,” says William Rutherford, president of Rutherford Investment Management. “If you add up enough of them, you can get some sense of where things are headed.”

But, obviously, different companies will offer different views of the future. Rutherford says he’ll be closely examining the outlook for financial firms. “Are they cleaning up their mess?” he asks.

Some executives are popular bellwethers for investors because they speak plainly and have a reputation for honesty. Rutherford puts John Chambers, the chairman and chief executive of Cisco Systems (CSCO), in that category. “If he says things are looking up, I’ll be happy,” Rutherford says. Cisco reports results on Aug. 5.