Your Investing Guide to This Earnings Season
Earnings season is here again, and with it comes the question of whether the quarterly ritual of analysts, money managers and media picking apart the reports of corporate America’s profit-making prowess still warrants all the hoopla.
July and August saw serious erosion in the linkage between share prices and earnings reports. Despite clear evidence of a suffering economy, big companies generally met or exceeded analysts’ earnings targets. If you set aside financials, including the $9 billion loss reported by Bank of America (symbol BAC), companies in Standard & Poor’s 500-stock index reported that second-quarter earnings were up 19.4% from the same period in 2010. For energy companies, the gain was a fat 39%; technology companies tacked on a healthy 24%.
But that was no match for a flood of scary economic and political news, both domestic and foreign. So investors dumped stocks as if they were contaminated cantaloupes. The S&P 500 lost 13.9% for the quarter and the Russell 2000 small-company index sank 21.9%. Only two short-lived relief rallies in August saved the S&P 500 from its own 20%-plus breakdown.
The third-quarter results are sure to show that business is still proficient at raking in bucks. Forecasters surveyed by Thomson Reuters foresee a 13% gain in third-quarter earnings across the S&P 500, and that counts expectations for a miserable 2.5% rise in earnings for financial companies.
Curiously, though, bank stocks might be the next contrarian investment surprise. Even if third-quarter earnings growth turns out to be flat, bank share prices look irrationally low. For example, three regional banks to watch -- BB&T (BBT), PNC Financial Services (PNC) and SunTrust Banks (STI) -- all trade well below book value per share (assets minus liabilities, divided by shares outstanding). If investors gain more confidence in the validity of those book values (that is, they become convinced that no big write-offs are in store), they could pile into these stocks.
If you’re looking for information about the overall health of corporate America rather than opportunistic trading ideas, earnings reports are still significant. Their value is in the details (pay attention not just to the actual reports but also to the conference calls with company officials and their Wall Street inquisitors). You get to hear what executives are saying or thinking about sales, orders, consumer behavior and more. What we’re eager to learn -- and raw earnings figures don’t say -- is whether the people running these major businesses have bright ideas to revive U.S. economic growth or they’re just hanging on for dear life.
Our lineup of earnings reports to watch changes in two places from last quarter. We’ve added homebuilder PulteGroup (PHM), whose shares have crashed 90% since they peaked in 2005, not long before the housing bubble began to burst. But at $4.36, the stock may finally be near a bottom. The number of homes Pulte sells and the price it gets for those dwellings is no longer falling, and word is slowly getting around that, with deals abounding and mortgage rates near record lows, there’s not much reason to postpone buying a house any longer.
We’ve deleted Hewlett-Packard (HPQ), which is more suited for a gossip column lately than a list of key stocks to follow. It is unfair to expect HP’s latest CEO, Meg Whitman, a former eBay chief and failed California gubernatorial candidate, to fix the company quickly. But HP proves that any company that fires bosses regularly and pays them lavishly to take a permanent vacation (or join a competitor) doesn’t deserve your time or your money. It’s embarrassing enough that Hewlett-Packard is one of the 30 elite names in the Dow Jones industrial average.
Here are our picks of 14 companies whose third-quarter earnings reports deserve special scrutiny. They are listed in order of expected earnings-release date.
IBM (symbol IBM)
Price as of October 14, 2011: $186.82
Reporting date: October 17
Estimated earnings: $3.22 per share, versus actual earnings of $2.82 per share in the same quarter last year
Because the Dow Jones industrial average is a price-weighted index and IBM is its highest-priced stock, the technology giant accounts for a whopping 12% of the Dow (by contrast, IBM accounts for 2.0% of the market-capitalization-weighted Standard & Poor’s 500-stock index).
But beyond the stock’s importance in the most closely watched barometer of the stock market, the fortunes of IBM, the company, are an indicator of global commerce -- especially in emerging markets, where economic growth is slowing. You’ll want to note whether IBM is suddenly struggling in BRIC countries (Brazil, Russia, India and China) or elsewhere in the developing world. If it is, IBM may have trouble meeting its full-year earnings forecast, which it raised last July. That would spell trouble for IBM shares and the overall stock market.
3 Regional Banks
Price as of October 14, 2011: $51.28
Reporting date: October 19
Estimated earnings: $1.48 per share, versus actual earnings of $2.07 per share in the same quarter last year
Price as of October 14, 2011: $22.53
Reporting date: October 20
Estimated earnings: $0.49 per share, versus actual earnings of $0.30 per share in the same quarter last year
Price as of October 14, 2011: $19.04
Reporting date: October 21
Estimated earnings: $0.35 per share, versus actual earnings of $0.17 per share in the same quarter last year
Since the last recession ended in 2009, banks’ results have improved, but bank stocks have performed poorly. Shares of these three regional banks have fallen hard since the companies released second-quarter results over the summer, even though each company is consistently setting aside less money to cover bad loans and all banks benefit from super-low short-term interest rates. Of the three, PNC is the healthiest and SunTrust the weakest. At some point, brave bottom-fishers (besides Warren Buffett, who has bet billions on Bank of America) will decide that these and other comparable banks aren’t going away, and they’ll cast their net for their unloved shares.
General Electric (GE)
Price as of October 14, 2011: $16.22
Reporting date: October 21
Estimated earnings: $0.31 per share, versus actual earnings of $0.18 per share in the same quarter last year
GE’s stock hit a 52-week low of $14.02 on October 4. Nothing CEO Jeff Immelt says or does -- or the company’s legendary affinity for minimizing taxes -- seems to help the share price for long. GE operates in many economic sectors, but it is still viewed as a bellwether for industrial America. If GE delivers good results, it might stop the bears from attacking shares of Caterpillar and other big industrial companies.
Price as of October 14, 2011: $81.44
Reporting date: October 24
Estimated earnings: $1.55 per share, versus actual earnings of $1.22 per share in the same quarter last year
Caterpillar’s lackluster second-quarter earnings announcement, which was unexpected, helped spread the summer stock swoon to other industrial powers, such as DuPont and 3M. A better showing by Cat in the third quarter will help those and all big industrials get back into favor with investors.
Just be sure to read beyond the numbers when Caterpillar issues its earnings statement. Cat had a fine first quarter and drastically raised its sales and earnings guidance for full-year 2011. But the CEO hinted at doubts when he issued his second-quarter comments. Let’s hope the boss has better things to say this time around.
Price as of October 14, 2011: $1.61
Reporting date: October 25
Estimated earnings: $1.61 per share, versus actual earnings of $1.53 per share in the same quarter last year
Analysts had expected this multi-faceted member of the Dow industrials to show earnings growth of just 4% in the second quarter. Yet 3M still came up shy of forecasts, prolonging a disappointing stretch for the stock. Look for comments from management suggesting a brighter 2012. That would help put this once-reliable stock back on sounder footing.
Price as of October 14, 2011: $43.77
Reporting date: October 25
Estimated earnings: $0.56 per share, versus actual earnings of $0.40 per share in the same quarter last year
DuPont is now mainly a drug, pesticide and agricultural seed company and less a part of smokestack America (and less a part of America, for that matter, what with 64% of its sales in other countries). DuPont had a fair second quarter but its shares are down 7.4% anyway since the last earnings release, mainly because the market’s been awful.
It sounds like a buying opportunity -- or is it? Analysts expect DuPont to deliver a huge (for a company this size) earnings gain of 40% in the third quarter. That sets the bar awfully high. If DuPont delivers growth of “only” 35%, the stock could tank unless there are extenuating circumstances.
Price as of October 14, 2011: $236.15
Reporting date: October 25
Estimated earnings: $0.24 per share, versus actual earnings of $0.51 per share in the same quarter last year
Amazon beat its sales and earnings forecasts handily in the second quarter despite bad employment and consumer-confidence readings. It was one of the few companies of note whose stock has been a winner pretty much all year. The stock is near its 52-week high and sells at a hefty 74 times estimated 2012 earnings.
If Amazon repeats and delivers another stellar earnings report, the stock is likely to keep rallying -- exuberantly high price or not. The question for non-Amazon shareholders is whether Amazon’s good fortune will continue at the expense of other retailers, including Wal-Mart Stores and Target, as well as Best Buy (Amazon already contributed to the demise of Borders). Amazon is rare among retailers in that its fiscal year ends on December 31 and it thus reports in the middle of earnings season.
Price as of October 14, 2011: $4.36
Reporting date: October 27
Estimated earnings: -$0.01 per share, versus actual earnings of -$2.63 per share in the same quarter last year
America’s largest publicly traded homebuilder (by revenue) looks hopeless. Its cash position is weakening, and all reports say Americans are still reluctant to buy homes despite the current buyer’s market. But at least the volume of new-home sales has stabilized. Pulte will be one of the survivors once the building industry’s shakeout ends, and a handful of analysts think Pulte may actually report a profit or break even this quarter. That has happened only one time in the past ten quarters.
Price as of October 14, 2011: $41.09
Reporting date: November 3
Estimated earnings: $0.36 per share, versus actual earnings of $0.29 per share in the same quarter last year
Shares of Starbucks, like those of Amazon, somehow hung tough during the dreadful third quarter. And this despite analysts forecasting that Starbucks’s earnings fell 3% in the period. Maybe investors perceive Starbucks to be unassailable in the caffeine business, much the way McDonald’s is in the burger biz. Trouble is, Starbucks shares are trading near their all-time high -- even though the stock market sure isn’t -- so investors will show little tolerance if the coffee king comes in below those already tamped-down expectations.
General Motors (GM)
Price as of October 14, 2011: $23.15
Reporting date: November 7
Estimated earnings: $0.92 per share, versus actual earnings of $1.20 per share in the same quarter last year
The reorganized GM beat second-quarter estimates by 35%, and the company is proving that it’s again a global force by announcing surging foreign car sales. (They love Buicks in China. Who knew?) GM is also showing that it can sell vehicles at home without offering Oldsmobiles, Pontiacs, Saturns or Hummers. The stock has fallen 11% since the August earnings report, but you can blame much of that on robotic traders that trashed all industrial stocks. Perhaps more good news from Detroit will attract serious buyers.
Berkshire Hathaway (BRK.B)
Price as of October 14, 2011: $74.05
Reporting date: November 4 (tentative)
Estimated earnings: $1.17 per share, versus actual earnings of $1.13 per share in the same quarter last year
Warren Buffett made more news than usual during the past three months, some of it -- his call for higher taxes on the rich -- straying from discussion of his enormously successful conglomerate. He also committed enormous capital to help out the beleaguered Bank of America, and he assailed Standard & Poor’s for its downgrade of America’s credit rating, saying the U.S. should be quadruple-A. Berkshire’s earnings report will put the focus back on Buffett’s baby.
Price as of October 14, 2011: $33.55
Reporting date: November 10
Estimated earnings: $0.55 per share, versus actual earnings of $0.67 per share in the same quarter last year
Disney’s second-quarter news twinkled with positive comments about hotel occupancy, theme-park attendance and the splendid performance of movies such as “Cars 2.” More important to investors, Disney is a window on the popular mood. People will tell a pollster that they have little confidence in the economy and none at all about our politicians. But the same folks will then spend $50 at the movies and upgrade their cable packages with all sorts of bells and whistles. Disney’s shares are up 1.6% since the company’s last earnings release, on August 9. Another quarter of positive news should send the stock higher.