Looking at Earnings Season

First-quarter earnings announcements will kick into high gear this week, and it’s not going to be pretty. We already had bad news from General Electric (GE) and that put the entire market in a bad mood on Friday. This is especially interesting to note because GE is about as close as a company gets to being an index fund. Their operations are so vast and diversified across several industries. There was also bad news at Alcoa (AA) and UPS (UPS).
When looking at the entire market, I prefer to follow the estimates for operating earnings. This isn’t always the cleanest number but I think it’s a good way to compare true business performance. According to S&P, the S&P 500’s operating earnings fell by over 30% in the fourth quarter. But I should add that these results were heavily impacted by the huge losses in the financial sector. To add some context, the loss in that sector was over 140% greater than the gain from one year before. But there was also considerable weakness in other areas like consumer discretionary (homebuilders) and material stocks.
According to S&P, earnings for the first quarter are expected to decline by another 5% (note: This estimate hasn’t been updated in a few days and I expect it to be a bit lower). However, the breadth of the earnings decline is much wider than last quarter’s when so much bad news came from financial stocks. Here’s a look at the operating earnings estimates for the first quarter.
Utilities………………….41.2%
Financials………………30.4%
Energy………………….23.5%
Materials……………….12.2%
Industrials………………6.8%
Tech………………………0.8%
Telecom…………………-0.2%
Discretionary…………..-5.8%
Staples………………….-8.5%
Healthcare……………..-50.0%
Today, David Kostin of Goldman Sachs commented on first-quarter earnings by saying “early signs are awful.” Yep, that pretty much sums it up. He also expects to see lower guidance going forward and I suspect he’s right. According to Bloomberg, Wall Street expects earnings growth of 11% for the entire year and I think that’s far too high. Estimates have been cut almost continuously since the beginning of the year.
So where are the good earnings? It’s still a bit early to say, but I’m interested in tech and health care and fortunately, two heavyweights report tomorrow. The Street expects Johnson & Johnson (JNJ) to earn $1.20 a share, which is just a bit above the $1.16 it made last year. In fact, if you adjust for inflation, that’s not much of a gain at all. Intel (INTC) is expected to earn 25 cents a share, which is below the 27 cents of the Street’s consensus. If either company surprises to the up or down side, it could have a ripple effect on the markets.
This Thursday, three of our Buy List stocks report; Danaher (DHR), Harley-Davidson (HOG) and Stryker (SYK). Danaher and Stryker tend to be fairly consistent with their earnings reports. Both stocks should report decent numbers and I’m not expecting a major surprise or shortfall.
Harley-Davidson, however, is the wild card. The stock has trended downward for nearly 18 months. The stock has lost more than 50% of its value, but Harley has a loyal following. If there’s good earnings news, then Harley could be a great bargain at this price. Unfortunately, there are too many questions and not enough answers right now. The Street is looking for 77 cents a share. If earnings come in at 80 cents or more, Harley-Davidson is definitely a stock to consider.

Posted by on April 14th, 2008 at 10:27 am


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