Are weak business software maker earnings a harbinger of an economic decline? Oracle fell after the release of a weak earnings report. On that news IBM dropped three percent. Weak business software maker earnings indicate reduced business spending and can be a signal of an impending decrease in economic activity. Fundamental analysis of Oracle shows a 14% fall in stock price on news that it only increased issuance of software licenses by 2% when it had predicted a much higher number. The news that Chinese export figures have fallen and that factory production is down is consistent with a business slowdown. It Europe it seems that they just cannot win. The drama of the more than two year old sovereign debt crisis drags on despite an agreement to amend the EU treaty to allow for closer fiscal integration. The agreements aimed at buttressing up the finances of the so called PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain) include giving more authority to the European Central Bank to make loans to weak governments and faltering banks. So, the bank just issued $639 Billion in loans to prop up banks. The first reaction of the market was one of relief and stocks rose. They were finally doing something to fix the situation. Then investors started worrying about why the banks needed so much propping up in the first place and stocks fell again.
Although weak business software maker earnings have a few worried there is good news as well. The US housing market is showing signs of life with an uptick in new home construction. Consumer stocks raised slightly, commonly a sign that investors are moving money into safer investments ahead of a retreat in the business cycle. Sometimes the best stock investment in a volatile market is a conservative stock. Earning of consumer stocks typically remain strong during a recession and stock prices raise as investors flee to quality. These companies are commonly dividend stocks as well, often providing a higher percent return than a CD at the bank. The reassuring thing about these stocks is that they may fall slightly in price during an economic recovery but will keep earning money, often more, as more disposable income is available for their products.
Earnings reports commonly drive stock prices up or down after their release. However, it is anticipated earnings that really drive stock prices. Just what does the poor earnings report from Oracle tell us? It may indicate that the company will sell less software in the near future but it does not tell us much about the long term. Here investors need to look at management, product line, research and development, and the degree to which its patents protect the company from competition. The intrinsic value of the company, its forward looking income stream, and its margin of safety, its tangible assets and cash, are better measures of long term price performance. A well-run company with lots of cash and a strong market position will commonly weather a down market and resume its rise when the economy recovers. A little investment research can go a long way in spotting stocks with good intrinsic value and a margin of safety for long term investment.