Investors: 2Q revenue a sign of economic health

NEW YORK — Investors want to see some new math in companies’ quarterly reports.

No longer content with an economy that’s limping toward recovery, the stock market is looking for signs that business improved in the second quarter or at least will in the coming months. And investors will measure that by the revenue figures companies put up as they issue earnings reports during the next four weeks.

Stocks punched higher in March when a handful of companies said profits for the first three months of the year wouldn’t be as dismal as feared. But many businesses achieved better-than-expected results by slashing costs, including payrolls.

Now Wall Street wants to see signs that companies are selling more goods and services — for the health of the corporations themselves and for the overall economy. But investors are already on the pessimistic side about earnings, and that has already pulled the Standard &Poor’s 500 index down 7 percent from its peak in mid-June.

Analysts polled by Thomson Financial expect earnings for the S&P 500 companies fell an average 35.5 percent in the April-June from a year earlier after falling the same amount in the first quarter.

Stocks could retreat further if companies don’t provide some morsels of hope about the economy, said Jennifer Ellison, a principal at Bingham, Osborn &Scarborough in San Francisco.

“If we get some earnings surprises on the downside it could deflate the balloon,” she said.

The early read from Alcoa Inc. provided evidence that companies might still be relying on cost-cutting. The company on Wednesday turned in a narrower-than-expected loss for the quarter, crediting efforts to slash expenses and raise cash.

Here are five companies that will report earnings this week. Each provides a snapshot of the economy.

Yum Brands Inc.

— Why it’s important: With chains including KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American Food, Yum’s 36,000 restaurants span 110 countries and territories. Fast-food chains tend to weather economic downturns better than sit-down restaurants because their food is cheaper.

— When it will report: Tuesday, July 14.

— What the experts say: On average, analysts polled by Thomson Reuters expect Yum to post a profit of 43 cents per share on revenue of $2.5 billion. In the same quarter of last year, the company reported a profit of 45 cents per share on revenue of nearly $2.7 billion.

— You’ll know the economy is improving if: Yum’s performance improves in its sluggish U.S. operations, especially at brands such as Pizza Hut that generally have higher customer checks. Better results at Pizza Hut and KFC — which has a sizable sit-down business — would signal that more people are opting to eat out rather than cook at home.

— You’ll know the economy is not improving if: Yum’s U.S. operations falter, especially at its higher-priced chains. Weak sales in Yum’s important China operations would be a sign of sluggishness in the global economy.

— The quote: “I’m expecting a pretty high-quality quarter. Things are going OK in the U.S., and I think things are going a little bit better than planned in China,” said Larry Miller, restaurant analyst with RBC Capital Markets.

IBM Corp.

— Why it’s important: As one of the world’s largest corporate technology suppliers, IBM’s results say a lot about how much businesses are willing to spend on everything from computer servers to software and consulting services. But it can be tricky to read those results for clues about the broader economy. For one thing, IBM right now is booking revenue on contracts that may have been signed months or even years ago. Second, in a down economy, companies often turn to IBM’s outsourcing services as a way to save money, so IBM’s sales can go up even while everything else is going down.

The best way to interpret IBM’s results for signs of the health of the overall economy is in the company’s overall forecast.

When it will report: Thursday, July 16.

What the experts say: On average, analysts polled by Thomson Reuters expect IBM to earn $2.02 per share on $23.58 billion in revenue. In the same quarter of last year, the company reported a profit of $1.98 per share on revenue of $26.8 billion.

You’ll know the economy is improving if: IBM’s sales show some improvement that can’t be attributed mainly to weakness in the dollar. Another encouraging sign would be if the company raises its already-bullish forecast for $9.20 per share in profit in 2009.

You’ll know the economy is not improving if: IBM backs off the forecast at all.

The quote: Brian Marshall, an analyst with Broadpoint.AmTech, wrote in a research note Thursday that IBM’s management has “navigated the turbulent “economic currents” over the past decade with fine stewardship,” but cautioned there might be little room left for IBM to keep wringing out increases in its profit margin.

Marriott International Inc.

— Why it’s important: Marriott operates more than 3,200 lodging properties worldwide, and the company’s performance offers insight on travel trends and consumer spending. Demand for its hotel rooms and timeshare resorts has been weak, and investors are curious about whether business picked up with the approach of summer.

— When it will report: Thursday, July 16.

— What the experts say: On average, analysts polled by Thomson Reuters expect Marriott to post a profit of 22 cents per share on revenue of $2.54 billion. In the same quarter of last year, the company recorded a higher profit of 51 cents per share on revenue of $3.19 billion.

— You’ll know the economy is improving if: Declines in hotel demand start to stabilize. If travelers are booking hotel rooms, it could mean consumer spending is increasing, despite continued layoffs nationwide.

— You’ll know the economy is not improving if: Revenue per available room sinks during the quarter. Known in the industry as revpar, revenue per available room is considered a key gauge of a hotel operator’s performance. Last quarter, revpar for Marriott’s comparable company-operated properties dropped 19.6 percent.

— The quote: “In North America, you will see stabilization for room demand. Leisure travelers are still going on vacations but they’re not going as far or not as long a period of time,” said Mark Basham, a hotel and restaurant analyst with S&P Equity Research. In 2008, the company recorded 61 percent of revenue in North America.

Harley-Davidson Inc.

— Why it’s important: Harley-Davidson is the top retailer of heavyweight motorcycles and its sales are closely tied to consumer confidence. A new hog, as they are called by fiercely loyal owners, is the consummate discretionary purchase and can run $20,000 or more.

— When it will report: Thursday, July 16.

— What the experts say: On average, analysts surveyed by Thomson Reuters expect Harley to report a profit of 25 cents per share on revenue of $1.18 billion. In the same quarter last year, the company posted a profit of 76 cents per share on revenue of $1.4 billion.

— You’ll know the economy is improving if: Operations at Harley-Davidson Financial Services stabilize. The company’s financing arm has been posting steep declines in operating income due to the lockup in the securitization market, which it has long relied on for funding. If that market shows signs of life, it means the lending market is easing.

— You’ll know the economy is not improving if: Harley cuts motorcycle shipments. Motorcycles are a big-ticket purchase and consumers buy them when they have money to burn. Last quarter, the company stood by its shipment guidance of 264,000 to 273,000 bikes.

The quote: “It is our expectation that the general economy and deteriorating employment numbers could hinder significant increases in motorcycle purchases,” KeyBanc analyst Scott Hamann wrote to investors on Tuesday.

Bank of America Corp.

— Why it’s important: Bank of America may help investors determine where the economy is headed since so much of its business depends on consumers and housing. The bank has about 55 million consumer and small business customers, making it vulnerable to delinquencies and defaults, yet also ready to thrive when the economy recovers. But the bank has internal issues, especially since CEO Ken Lewis’ management ability has been questioned following BofA’s acquisition of Merrill Lynch &Co. The bank has received $45 billion in bailout funds, but it’s not known when it will repay the government.

— When it will report: Friday, July 17

— What the experts say: On average, analysts polled by Thomson Reuters expect Bank of America to post a profit of 24 cents per share on revenue of $32.35 billion. In the same quarter of last year, the company recorded a profit of 72 cents per share on revenue of $20.32 billion, before the Merrill acquisition.

— You’ll know the economy is improving if: There’s any sign of improvement in credit. It’s a given Bank of America will see more debtors fail to make payments. The question is whether the rise in defaulting loans is starting to moderate, especially among credit cards and mortgages.

— You’ll know the economy is not improving if: Loan defaults accelerate at a much faster pace than expected.

— The quote: “This is a crucial period for Ken,” said Gary Townsend, president and chief executive of private investment group Hill-Townsend Capital Inc. “He must show his board members and shareholders that his stewardship through the financial crisis and then into the future is something that has been appropriate, adequate and satisfactory.”

General Electric Co.

— Why it’s important: GE is one of the world’s biggest companies. It has 4 million shareholders. Millions of people have GE microwaves in their kitchens. If you flew on a plane recently, chances are good the engines were made by GE. Your favorite NBC television show comes to you courtesy of GE, which owns the network. Your doctor may use GE software to store your medical records. Some of the electricity for your home may come from churning GE windmills. And that light bulb in your bedroom lamp may very well be a GE bulb.

— When it will report: Friday, July 17.

— What experts say: On average, analysts polled by Thomson Reuters expect GE to post a profit of 23 cents per share on revenue of $42.3 billion. In the same quarter of last year, the company recorded a profit of 54 cents per share on revenue of $45.31 billion.

— You’ll know the economy is improving if: GE’s aircraft engine sales hold up. Big plane makers like Boeing are seeing orders slump, but GE is still doing a brisk business fixing engines that it already sold. If new engine sales are steady, that could show the downturn in global aviation might not be as bad as feared.

— You’ll know the economy is not improving if: GE’s commercial real estate business keeps tanking. GE owns a lot of shopping centers, manufacturing plants and office buildings through its GE Capital finance division. Many of those are empty as companies and retailers cut back due to the recession.

— The quote: “If we don’t get some huge surprise on the revenue side, that is probably a good confirmation that the worst is over,” said Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors, which owns 6.4 million GE shares.