1St Quarter Earnings Season Kicks Off
Earnings Preview 4/9/10
Next week is the “kick-off” for the first quarter earnings season. Of course, there are a few firms that have already reported, but all of them have February fiscal period ends, and should be considered part of the pre-game festivities.
Alcoa (AA) will report on Monday after the bell and really get the game started. There are not a lot of companies reporting next week, only 61 in total, but what reports lack in quantity they will make up for in importance.
In addition to Alcoa, 20 more S&P 500 firms will report, including such important bellwethers as CSX (CSX) in Transportation, JPMorgan (JPM) and Bank of America (BAC) in Banking, Intel (INTC ) and Google (GOOG) in Technology, and General Electric (GE), which is probably the best one company proxy around for the overall U.S. economy.
The economic data calendar will also be potentially market-moving. We start out the week with the monthly Treasury budget numbers to see how big the deficit is, then get data on the Trade Deficit on Tuesday. On Wednesday, the focus shifts to Inflation as the CPI is released. Wednesday will also see the Retail sales numbers and the Fed Beige Book.
On Thursday, as always, we get the initial and continuing unemployment claims data. More importantly on Thursday will be the report on Industrial Production and Capacity Utilization. Finally, we finish out the week with Housing Starts and Building Permits, and well as the University of Michigan Consumer Sentiment survey. Any one of those results has the potential to significantly move the markets.
• The Treasury Budget is released. The headline number will be the size of the monthly deficit. However, it will be interesting to see how much of it comes from falling revenues vs. how much from increased spending, and where the spending is increasing. This data is highly seasonal, but is not seasonally adjusted. Thus, ignore the month-over-month comparisons, and focus on the year-over-year changes. In March of 2009, the Federal Government bled 1.6 billion in red ink, and will probably hemorrhage more this year.
• The Trade Deficit will be reported. In February it was .3 billion, an improvement over the .9 billion of January, but the improvement came for the wrong reasons — both imports and exports fell. Look for the March deficit to be in the same neighborhood as the February shortfall, but with both imports and exports rising. Rising oil prices will be a major cause of the rise in imports.
• The Consumer Price Index will most likely remain very well controlled, particularly if one strips out food and energy prices. In February, the overall index was unchanged and the core rose just 0.1%. Look for headline to be well above the core in March thanks to higher energy prices. The core index is heavily influenced by housing costs, most notably rent and owners-equivalent rent. Look for those components to be either unchanged or down slightly. A higher-than-expected reading, particularly for the core, would be very bad news for the markets since it would raise expectations that the Fed would tighten sooner than people now expect. However, the current data suggests that Unemployment and slack capacity are still much bigger economic problems than inflation, and thus the Fed is likely to keep the Fed funds rate at its current near-zero level for at least the rest of 2010.
• Retail sales should be very strong in March, as evident by the extremely strong same-store sales reports from the major retail chains. Auto sales were also strong in March. Look for an acceleration from the overall rate of 0.3% growth in February and the 0.8% rate excluding autos.
• The Beige Book comes out in the afternoon. It is a collection of mostly anecdotal data collected from the 12 Federal Reserve districts and provides some color on the economy. Look for it to show the economy to be recovering but from a very depressed overall level.
• Weekly initial claims for unemployment insurance come out. They rose 18,000 in the last week, to 460,000. After a huge downtrend from mid-April through the end of 2009, initial claims have become very erratic so far in 2010. Look for them to fall back modestly next week. Overall we have made good progress, but not good enough. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is, on balance, adding jobs. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but still have a ways to go.
• Continuing claims have also been in a steep downtrend of late. However that is in part due to people simply exhausting their regular state benefits, which run out after 26 weeks. If one factors in the extended claims paid by the Federal government as part of the Stimulus program, claims soared last week. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. Last week regular continuing claims were 4.550 million, down 131,000 from the previous week. Extended claims (paid from Federal ARRA funds) were 5.808 million, a decrease of 224,000. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• Industrial Production should continue to rise in March, and at a faster pace than the 0.1% gain in February. Most of February’s gain came from Mining and Utility output, as manufacturing output actually fell 0.2%. Weather is often as much of a factor in Utility output as is the rate of economic activity. Gains should be more on the order of the gains seen in January when both overall industrial output, and manufacturing output climbed by 0.9%.
• The same report will also show the rate of Capacity Utilization, which in February rose slightly to 72.7% overall, but slipped in Manufacturing to 69.0%. As with Production, the Utility utilization rate is often as much a function of Weather as economic activity, so see if the overall change is matched by the change for manufacturing. While Utilization rates have been trending upward over the last 8 months, they remain at extremely depressed levels, particularly for Manufacturing. The manufacturing rate would have to rise by 10 full percentage points just to get us back to the long-term average rates of utilization. It is very unlikely that core inflation will take off with utilization rates that depressed. These reports are very important and very under reported and it would be worth your while to pay attention to them.
• Housing remains the key thorn in the side of the overall economy. Traditionally residential investment is the key locomotive leading the economy out of recessions, but not this time. Housing starts dropped to an annual rate of just 575,000 in February, virtually unchanged from the year before. With New Home Sales Setting back-to-back record lows in January and February, it is likely that starts will continue to be very slow, as the last thing that builders want to do now is build a lot of speculative inventory. However, we might see some rise on a month-to-month basis since some housing starts might have been put off in February due to the snow storms. Also, most of the February decline in starts was in the very volatile apartment area.
• Building Permits are the best leading indicator of housing starts. They were running at an annual rate of 612,000 in February, which would indicate some rise in housing starts in March. Look for a small increase in Permits in March.
Potential Positive Surprises
Historically the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter. While pickings are getting slim, some of the companies that have these characteristics include:
Fairchild Semiconductor (FCS) is expected to report EPS of 0.23, up from a loss of .32 per share a year ago. Last time out, FCS posted a positive surprise of 35.3%, and over the last month the mean estimate for its fourth quarter earnings is up 2.43%. FCS has a Zacks #1 Rank.
Peabody Energy (BTU) is expected to post EPS of .42, down from .50 a year ago. Last time, BTU beat expectations by 43.3%, and over the last month analysts have raised their estimates for the about to be reported quarter by 0.12%. BTU is a Zacks #2 Ranked stock.
Talbots (TLB) is expected to post EPS of .02 as opposed to a loss of .40 a year ago. Last time out the company blew away expectations by 293.8%. The analysts have become far more bullish about the soon-to-be-reported quarter, raising their estimates over the last month by 85.7% (OK, with rounding it’s an increase from .01 to .02). TLB is a Zacks #2 Ranked stock.
Potential Negative Surprises
Charles Schwab (SCHW) is expected to post EPS of .11 a share, down from .19 a year ago. Last time they reported 6.7% below expectations. For this Zacks #4 Rank stock, analysts have cut the estimates for this quarter over the last month by 25.6%.
CVB Financial (CVBF) is expected to earn .13 a share this quarter, unchanged from a year ago. They were 91.1% below expectations last time out. Analysts have cut the estimate for this quarter by 8.7% over the last month. The stock holds a Zacks #5 Rank.
Health Care Services (HCSG) is expected to earn .20, up from .18 a year ago. Last time out, this Zacks #4 Ranked stock disappointed by 25.0%, and over the last month analysts have shaved their expectations for the quarter by 0.97%.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service. For more information, visit http://www.zacks.com.