Despite my prediction last week that there was more potential for downside than upside in this quarter's results, earnings season has started with a bang. So far, the better-than-expected results have been driven by two major themes. The first is corporate cost-cutting. As my colleague Bob Johnson has discussed, the flipside of all of the job losses we've been seeing is that corporations have been forced to become more efficient and productive--boosting margins. This is not sustainable--eventually firms will have to rehire to expand--but it is helping results in this quarter.
The second major theme has been the continued reawakening of international markets, notably China. The Chinese desire for raw materials and other goods is helping plump up global demand. With other countries in the region showing stability or even growth, it's possible to see the region as an engine for global growth, as the U.S. and Europe deal with continued economic woes.
Earnings Review
Yum Brands (
YUM) reported results that reflect both of the aforementioned trends. Yum has a lot riding on its expansion in China, and that continued unabated in the quarter. Retail analyst R.J. Hottovy
remarked that the firm's "global unit expansion was enough to offset flat same-store sales in the China and international segments and a 6% same-store sales decline in the U.S." Yum managed to improve profitability thanks to declining commodity costs and a reduction in corporate overhead.
Alcoa(
AA) also posted
better-than-expected results for the third quarter. Chinese demand was "an important force behind third-quarter price recoveries" according to basic materials analyst Min Ye. China has had six months of high imports, but this is a trend that looks set to reverse itself as the country restarts its smelters. Although this higher supply may have a negative impact on spot prices, the fact that the underlying demand exists is a good sign for the Chinese economy.
Closer to home,
Costco (
COST) showed
several encouraging signs.
