Earnings Preview 01/20/2012: Earnings Season in Full Swing

By: Dirk Van Dijk
January 20, 2012

Earnings Preview 1/20/12

Earnings season will be in full swing this week. 422 firms are scheduled to report, and 117 of those will be members of the S&P 500. By the end of the week we should have a very good handle on just how weak or strong this earnings season will be.

The firms reporting next week read like a who’s who of American industry. They include: Abbott Labs (ABT), Apple (AAPL), Automatic Data Processing (ADP), AT&T (T), Boeing (BA), Bristol Myers (BMY), Caterpillar (CAT), CSX (CSX), Chevron (CVX), Colgate Palmolive (CL), Conoco Phillips (COP – Analyst Report) and DuPont (DD) – and that is just in the first four letters of the alphabet!

It will also be a moderate week for economic data. Things will be slow early in the week, with no major news until Wednesday, when we get the Pending Home Sales data and the Fed releases the policy statement following their meeting. Thursday will be the busiest day of the week with New Orders for Durable Goods and New Home Sales, along with the regular weekly Initial Jobless Claims data. The biggest report of the week, however, is on Friday, when we get the first look at GDP growth in the fourth quarter.

Monday

Nothing of particular significance.

Tuesday

No major economic reports, but in the evening President Obama will present his third State of the Union address.

Wednesday

Pending home sales are expected to have declined 3.0% after a 7.3% surge in November. However, given the high number of contract cancellations recently due to people unable to get mortgages, and due to appraisals coming in lower than expected, this number has been less accurate than in the past in predicting existing home sales.

The Fed is expected to keep the Fed Funds rate in the 0-0.25% range it has been locked in since December 2008. There is a chance that they will announce another round of quantitative easing, but the probability is less than 50% they will do so. The post-meeting statement will be closely examined for any clues as to the direction the Fed will be taking.

Thursday

Weekly Initial Claims for Unemployment Insurance plunged by 52,000 to 352,000. However, that shocking drop came after a surprisingly large rise the week before. My sense is that they were both flukes, but in offsetting directions. The consensus seems to agree and is looking for claims to rise to 375,000 which would be just a little bit below the average of the last two weeks. These past two weeks illustrate just how volatile week-to-week numbers can be, so the four-week average is the thing to focus on (at 379,000 last week). Keep an eye on the prior week’s revision as well as the change from the revised number.

Continuing Jobless Claims have been in a downtrend of late, but the road down has been bumpy. Last week they fell by 215,000 to 3.432 million. That is down 518,000, or 13.1% from a year ago. The consensus is looking for a rise to 3.550 million. Some (most?) of the longer-term decline is due to people simply exhausting their regular state benefits, which run out after 26 weeks. Those, however, don’t last forever either. Federally paid extended claims rose by 105,000 to 3.460 million last week but are down 1.192 million, or 24.5%, over the last year. 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. A better measure is the total number of people getting unemployment benefits — currently at 7.887 million. The total number of people getting benefits is now 1.762 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity — finding a new job — and how many have left on the road to poverty, having simply exhausted even the extended benefits. Unless the program is renewed, all extended benefits will end at the start of March. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

New Orders for Durable Goods are expected to rise 2.0% for December, on top of a 3.8% surge in November. While those are simply fantastic numbers, they are also a bit deceptive. Most of the strength is from the extremely volatile and lumpy Transportation Equipment segment, specifically from orders for jetliners. Since they are such big-ticket items, a few orders here and there can swamp the rest of the numbers. If Transportation Equipment is excluded, orders are expected to be up 0.7% on top of a 0.3% rise in November. That’s still a pretty healthy growth rate, but nowhere near as spectacular as the headline number would suggest.

New Home Sales are expected to rise to a seasonally adjusted annual rate of 322,000, up 2.2% from the November rate. While it is nice to see new home sales picking up, it is still an extremely low rate. The 20 lowest months in the history of New Home Sales data (back to 1963) have all been in the last 20 months, and if the consensus is right, it will make it 21 out of the last 21 months. Recently, though, the housing data has been coming in a bit better than expected, particularly when it comes to single family homes. New home sales are what have powered every single previous post-war recovery. The extraordinarily low level of new home sales is one of the most important reasons that this recovery has been relatively slow. If housing does get into gear in 2012, U.S. economic growth is likely to be much higher than most people expect. The key word in that last sentence, though, is “if.”
The Index of Leading Economic Indicators is expected to rise by 0.7%, on top of a 0.5% increase last month.

Friday

We get the “Big Kahuna” of economic reports: GDP for the fourth quarter. This will be the first of three releases of the data, which is subject to significant revisions in the later releases. The pattern of accelerating economic growth is expected to continue, with growth of 3.1% growth expected. That is up from 1.8% in the third quarter, 1.3% on the second and just 0.4% in the first quarter. The composition of the growth can be just as important and interesting as the overall level. Growth that simply comes from inventory accumulation is not as bullish as growth that comes from businesses investing in new plant and equipment, for example. We will provide a complete breakdown, not just of the level of growth in the quarter, but where in the economy it came from.
The University of Michigan Consumer Sentiment index is expected to edge up to 74.2 from 74.0. It has been moving up in recent months but is still at a low level. However, since what consumers say in the survey is often very different than what they actually do, I think this is one of the most overrated economic indicators around.

Potential Positive or Negative Surprises

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. Similarly, a recent history of earnings disappointments, cuts in the average estimate for the quarter in the month before the report is due and a poor Zacks Rank (#4 or #5) are often red flags pointing to a potential disappointing earnings report.

In the Earnings Calendar below, $999.00 should be read as N.A.

Potential Positive Surprises:
Caterpillar (CAT) is expected to earn $1.73, up from $1.47 a year ago. Last time out, it had a positive surprise of 21.38%, and over the last four weeks analysts have raised their estimates for the quarter by 0.35%. CAT is a Zacks #1 Rank stock.

W.W. Grainger (GWW) is expected to earn $2.10, up from $1.79 a year ago. Last time out, it had a positive surprise of 7.26%, and over the last four weeks analysts have raised their estimates for the quarter by 0.16%. GWW is a Zacks #1 Rank stock.

Western Digital (WDC) is expected to earn $0.72, down from $0.96 a year ago. Last time out, it had a positive surprise of 15.79%, and over the last four weeks analysts have raised their estimates for the quarter by 2.88%. WDC is a number two Zacks #2 Rank stock.

Potential Negative Surprises:
DeVry (DV) is expected to earn $1.00, down from $1.25 a year ago. Last time out, it had a negative surprise of 13.54%, and over the last four weeks analysts have not changed their estimates for the quarter. DV is a Zacks #5 Rank stock.

Juniper Networks (JNPR) is expected to earn $0.21, down from $0.36 a year ago. Last time out, it had a negative surprise of 5.00%, and over the last four weeks analysts have slashed their estimates for the quarter by 19.14%. JNPR is a Zacks #4 Rank stock.

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