It’s earnings season – yes, it’s already that time again – and investors will be eyeing this week’s reports for insight into two of the most uncertain and important sectors: technology and banks. As of a month ago, analysts had been expecting banks to lead the way higher, with technology being a drag on the overall earnings picture.
That overall picture is particularly important right now, in light of the stock market’s hefty gains in the first quarter of the year and recent economic data (including weak retail sales, falling consumer confidence, a still-gloomy job market). It may take a lot of “positive surprises,” or companies beating analysts’ expectations, to offset that mixed picture for the economy.
By the end of this week – one of the busiest of the earnings-reporting period, with more than 70 S&P 500 companies scheduled to release their results – we’re likely to have a much stronger picture of profit growth in the first quarter. The hope is that it will be stronger than analysts’ consensus expectations for a 1.5 percent gain, according to Greg Harrison, the analyst who tracks all these reports for Thomson Reuters. Here’s a snapshot of some of the most interesting and/or significant earnings reports expected this week, and what they may be able to tell us.
We have already seen data from the likes of J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC), both of whom reported big gains in profits – 33 percent and 22 percent, respectively. On a worrying note, the banks revealed that the mortgage financing (and refinancing, and re-refinancing) activities that had aided their post-crisis turnaround are faltering. That showed up in revenue numbers, which fell at both banks. Nor are there many options to replace that income: Businesses are cautious about borrowing and banks now are barred from some of the activities that used to cushion such drop offs but now are deemed too risky (like proprietary trading). Investors will be paying keen attention to the remainder of the big banks reporting this week for signs that this trend spans the sector, as well as for other signs of potential trouble or sluggish future growth.
Citigroup (NYSE: C): This is the first in our group of interesting companies to watch this week to have reported its results – and they were indeed of interest, as the bank announced not only a 30 percent gain in net income but also higher revenue from its capital markets division. It also released some capital from its loan-loss reserves. There is still reason to be concerned about the need by banks to slash costs in order to keep profitability rising, but the forecast that banks would lead the way higher in the first quarter seems likely to be fulfilled.
Goldman Sachs (NYSE: GS): The forecast is for this former investment bank to report earnings of $3.88 a share when it announces its results Tuesday. Last year, Goldman managed to double its profits, although the bank’s share price climbed only 40 percent. Investors here also will be looking for insight into the company’s risk management and risk appetite.
Blackstone (NYSE: BX): The private equity fund, which will report its results on Thursday, is expected to announce it earned 55 cents a share for the quarter, according to I/B/E/S and Thomson Reuters. That would be a big improvement over the 39 cents a share from a year earlier, but then Blackstone has sounded notably more optimistic of late about its ability to profit on the sale of its portfolio companies in a more benign market environment.
A lot of questions surround this sector. Although some of these companies emerged as top performers in the first quarter (with Hewlett-Packard as one example), tremendous changes are underway, both on a macro level as consumers drift away from the PC and toward tablets, and within the companies themselves (as Dell now appears to be targeted by multiple buyout funds.)
Yahoo (NASDAQ: YAHOO): Some big questions hover over this company, and not just because of CEO Marissa Mayer’s widely discussed mandate that all employees must work in an office and not from home. The company still trades at only 7.24 times trailing earnings, and any future partnership with Apple – if it materializes – won’t be contributing to earnings for some time. The official estimate for the company’s first-quarter earnings is 24.4 cents, pretty much flat with last year’s results, although Harrison at Thomson Reuters notes that his company’s models suggest there is the prospect of a small positive surprise. If that happens, it might spark some additional investor interest in the stock.
Intel (NASDAQ: INTC): Once, Intel’s chips were premium products; today, they seem to have become commodities, and the company is suffering as a result. With its earnings due out Wednesday, the consensus is that the company will report a profit of 41 cents a share, down from 53 cents in the year earlier period. Intel, which led the way in the PC revolution, has been slower to adapt its products to meet the demands of mobile devices. Investors will be delving into the minutiae of the company’s earnings release and conference call for hints on the company’s thinking about the new chips it’s developed – and their spending on production capacity.
eBay (NASDAQ: EBAY): PayPal has helped power Ebay’s rise – the company’s stock has soared 58.4 percent over the last 12 months and has seesawed to a gain of nearly 5 percent so far this year. Its valuation is nearly double that of the S&P 500, and analysts are expecting the company to follow through on that implied promise by delivering earnings of 62 cents a share, up from 55 cents a year earlier. That would be a welcome relief after a big decline in fourth-quarter profits contributed to a net decline in 2012 earnings over 2011 levels. Importantly, though, investors will again be listening for a discussion on eBay’s future strategy to profit still more from mobile mania.
The Wild Cards
AMR: The parent company of American Airlines, still in bankruptcy, will issue what is likely to be one of its final earnings reports as an independent company this week, and analysts are calling for a profit of $2.05 a share. When AMR emerges from bankruptcy, it almost certainly will be as part of US Airways. As significant as what the company says about its profits will be the insight it provides into fares, revenue per passenger mile and its outlook for jet fuel prices. Analysts and investors are warming up to airline stocks, and once merged, AMR/US Airways will be the world’s largest airline.
Sherwin-Williams (NYSE: SHW): Credit Suisse recently repented publicly of its long-time bearishness on this paint manufacturing company’s stock, long a way for investors to play the housing market’s rebound. Does the slowdown in the mortgage financing machines at the banks say anything about housing trends that might alarm investors in this company? We’ll have some insight on Thursday, but analysts are becoming notably more bullish, calling for earnings of $1.10 a share, on average, up from 95 cents in the year-earlier period. Look for any comments about how interest in remodeling might be hit by all the factors that have put a dent in retail sales this year – especially since the stock price already is pricing in some fairly significant growth for what is, at heart, still a cyclical company.
Chipotle Mexican Grill (NYSE: CMG): Is it hot or not? Analysts are calling for the company to report net income of $2.14 a share for the quarter, up from $1.97 a share in the year earlier period. That growth is solid – but is it spectacular enough for what at heart remains a “concept” stock? Investors will want to hear how the company is coping with higher food prices, and want to understand whether it will be able to pass those costs on to its consumers. They’ll also be listening for more insight into the company’s new catering venture.