We're nearing the halfway point in this quarter's go-round of earnings season, and investors are squarely focused on seeing how their favorite companies did as they close the books once and for all on 2012. But while many investors celebrate or mourn their stocks based on past results, smart investors only care about the past if it can tell them something useful about the future.
We've seen a lot of positive reports so far, but some companies have seen their growth engines start to misfire, and if they can't remedy the situation quickly, that can spell long-term trouble for their stock prices. Let's take a look at the 30 companies among the members of the Dow Jones Industrials (DJINDICES:^DJI) and highlight five that are seen posting falling revenue over the course of their 2013 fiscal years.
Why revenue growth is so important
Revenue is the main driver of how healthy a business is. There's only so much cost-cutting, margin expansion, and productivity gains a company can successfully do before it begins to meet diminishing returns, and at that point, it needs greater sales to keep profits moving higher.
Often, falling revenue matches up closely with falling earnings. For Hewlett-Packard (NYSE:HPQ), for instance, the declines in the overall PC industry have spurred the company's attempts at a major restructuring, as HP tries to figure out how to make radical changes to its sources of revenue in order to bolster profitability. Following the lead of other tech giants, HP has tried to move toward higher-margin IT services and other more lucrative niches. But given the highly competitive environment in tech, HP's progress has been slower than many had hoped, and that's a big part of why analysts expect HP to show sales down 6.7% this year, with earnings dropping an even steeper 18%.
Some companies' net profit figures are highly sensitive to changes in sales. Analysts believe that Caterpillar's (NYSE:CAT) earnings per share will drop more than 6% this year despite projections of less than a 1% drop in sales. The problem that Caterpillar faces is that in a slow-growth environment for the global economy, customers tend to focus on lower-cost, lower-margin items as bare necessities, foregoing or at least delaying major capital expenditures until economic activity picks up. In many ways, that's just the nature of a cyclical business, so bullish investors can expect equally strong swings back upward when the global economy improves.
Dealing with industrywide dynamics
Some of the more interesting comparisons take companies in the same sector and look at how they deal with the same sorts of problems. A great example comes from Big Pharma, as both Pfizer (NYSE:PFE) and Merck (NYSE:MRK) are seen suffering modest drops in revenue in 2013 as they continue to suffer from major patent expirations. Yet the picture couldn't be more different on the earnings front, as Pfizer is seen posting a 6% gain in earnings per share while Merck could see an EPS drop of 3%. Admittedly, Pfizer didn't fare as well as on the EPS growth front as Merck did in 2012, and so Merck is arguably playing catch-up on the downside.
But another important difference may explain why Pfizer has fared better. Merck has made the standard response to patent expirations by trying to ramp up new development. But Pfizer wasn't content to let its blockbuster drug Lipitor go to waste when its patent expired, instead offering huge rebates and discounts to try to squeeze every last cent out of the drug rather than simply giving way to generic competitors. By fighting for sales, Pfizer demonstrated a novel approach that could guide the industry's response to patent expirations across the industry in the years to come.
Finally, ExxonMobil is dealing with the difficulties of the rapidly growing oil and gas industry. Despite the wealth of new projects happening around the world, declining production and weak prices have taken their toll on top-line growth. Yet because so much of Exxon's business depends on commodity pricing beyond its control, it's hard for the company to do much to resolve the situation. With organic growth proving increasingly hard to come by, Exxon will probably have to use its size to make ongoing acquisitions to grow its top line.
Don't give up on growth
Just because a company suffers a temporary drop in revenue doesn't mean it's at death's door. It does mean, though, that you should keep an eye on its future prospects to make sure it can pull out of its sales slump before it turns into a downward spiral.