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Lots of Earnings, Lots of Data

Earnings Preview 4/30/10

 

Earnings season will be in full gear next week as 991 firms report, including 99 (1/5) of the firms in the S&P 500. The list of companies reporting includes such heavy-hitters as Kraft (KFT), Merck (MRK), Pfizer (PFE), Time Warner (TWX) and Duke Energy (DUK).

 

In addition to the ongoing earnings parade, there will also be a heavy calendar of economic data, with several numbers that could have a big impact on the market. We start the week with March data on Personal Income and Spending, along with data on auto sales. Along the way, we get both sets of ISM numbers as well as the productivity growth in the first quarter. This all leads up to the biggest number of all: the employment report on Friday.

 

Monday

 

* Personal Income is expected to have risen by 0.3% in March after having been unchanged in February. Personal income is a broad measure that not only includes wages and salaries, but government transfer payments, dividend checks and rental income. It ultimately is the chief source of fuel for consumer spending.

* Personal Spending is expected to rise by 0.6% in March up from 0.3% growth in February. If spending is rising faster than income, then it means that the savings rate is falling. In the short term, that is good news since a falling savings rate helps boost the economy. In the long term, it is very bad news since it starves the economy of the investment capital it needs for growth (or forces us to import the capital in the form of a higher trade deficit). Over the long term, the current U.S. savings rates, which are among the lowest in the world, are unsustainable. A core dilemma for the U.S. economy is the fact that it is impossible to move from an unsustainably low savings rate to a higher savings rates without the savings rate actually rising and thus slowing economic growth.

* The ISM Manufacturing survey (PMI) is expected to show growth accelerating in the manufacturing sector with a reading of 60.0, up from 59.6 in March. The index is constructed so that any reading over 50 indicates expansion, and a reading below the magic 50 level means contraction. It is a compilation of ten sub-indexes covering things like the level of production, new orders, and employment levels. An overall reading of 60.0 is a very healthy level, but there is more information to be gleaned in looking at the behavior of the sub-indexes, as well.

* Construction spending is expected to have contracted again in March, but at only 0.3% rather than the 1.3% decline in February. Don't read the slower rate of decline as being all that much good news, however. The decline in February was probably exaggerated by the blizzards. Construction, both residential and commercial, continues to act as a major drag on the economic recovery.

* Auto and truck sales are expected to have fallen back slightly in April, with consensus expectations of a rate of 4.2 million for autos, down from 4.3 million in March and truck sales falling to 4.6 million from 4.8 million. Personally, I think there is enough momentum that sales will surprise to the upside. On the other hand, March sales were boosted by heavy incentive spending.

 

 

Tuesday

 

* Factory Orders are expected to have fallen by 0.2% in March, partly reversing a 0.6% gain in February. This report is mostly "old news," as the most volatile part of factory orders are the orders for durable goods that were already released (they were strong, with the exception of the very lumpy civilian aircraft category).

* Pending Home Sales are expected to have risen by 5.0% on top of a 8.2% rise in February. With the end of the homebuyer tax credit approaching, I'll take the "over" on this one as well, although there will be much more of that impact in the April report, which will be coming out a month from now. The bigger question is how much of a sales hangover we have in May and June from the party in April.

 

 

Wednesday

 

* The ADP "appetizer" for the big employment report main course on Friday is expected to show an increase of 30,000 private sector jobs. Last month the survey greatly undershot the "official BLS numbers" by reporting a loss of 23,000 jobs while the BLS noted a gain of over 100,000 private sector jobs. The ADP survey does not include government workers at any level. With the ongoing hiring for the Census, that is a very large difference at this time.

* The ISM Non-Manufacturing, or Service, index is expected to show growth in the Service sector (far larger than the Manufacturing sector) accelerating with a reading of 56.1, up from 55.4. The Service index has lagged well behind the Manufacturing index for several months now, but has also been seeing steady increases. As with the Manufacturing index, it is based on a Magic 50 number and is comprised of 10 sub-indexes, each of which provides useful information in addition to the headline number.

 

 

Thursday

 

* Weekly initial claims for unemployment insurance come out. They fell 11,000 in the last week to 448,000. 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 again next week, with the consensus looking for 440,000. Longer term, 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 we 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 4.645 million, down 18,000 from the previous week. Extended claims (paid from Federal ARRA funds) were 5.403 million, a decline of 91,000. That decline was probably as much the result of people falling off the rolls due to even the extended benefits running out, not because they all found new jobs. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

* The rate of Productivity growth is expected to have slowed to 2.4% from the breakneck pace of 6.9% it recorded in the fourth quarter. Over the very long term, productivity growth is one of the most important of all economic statistics, since it governs the growth of GDP per capita, which is really the measure of how rich the country is, more than total GDP. After all, even under Mao, China had a larger GDP than Sweden, even though no one would have thought that the Chinese were richer than the Swedes. In the short-term, though, it means that we are able to make the same amount of stuff with fewer workers, which is really not what we want when faced with persistently high unemployment. The expected rate of 2.4% is more consistent with the long-term trend. The 6.9% rate of the fourth quarter, and the even faster rate in the third quarter of 7.8%, are reflective of an economic rebound and are not sustainable over the long term. If the number comes in higher than the 2.4% rate, look for an upward revision to the 3.2% rate of GDP growth.

 

 

Friday

 

* The unemployment rate is expected to remain at 9.7% for the fourth month in a row. If this number surprises, it is likely to come in higher rather than lower, even if the economy starts to add jobs as in economic recoveries the civilian participation rate, or the percentage of the population that is either working or wants to work tends to rise. The participation rate has already started to increase, rising by 0.1% in each of the last three months, a trend that is likely to accelerate.

* The economy is expected to have added 187,000 more jobs in April, on top of the 162,000 it added in March. While that certainly is a massive improvement over the loss of a quarter million jobs a month that the economy was recording in late 2008 and early 2009, at that rate it will take a very long time to make up for the 8.4 million jobs that have been lost in the downturn. Of particular interest will be two types of temporary jobs. Regular temporary workers from places like Kelly Services (KELYA) are a good leading indicator of future employment trends. The other temporary jobs of note will be new Census jobs, which are a once a decade short-term boost to the employment numbers. While the jobs pay fairly well and are better than people being unemployed, growth that comes from that source will be considered low quality growth since the jobs will only last five or six months at the most.

* Other data to look for in the report are the unemployment duration numbers, which have been particularly awful in this downturn and hit new records in March. Check the under-employment rate (U-6), which includes the discouraged workers as well as those that are only working part time but want full-time jobs, the length of the average work week -- which is expected to remain flat at 34.0 hours -- and the employment-to-population ratio (also known as the employment rate, which measures the percentage of the population, including the very young and very old) -- that are working. Also average hourly earnings, which are expected to rise by 0.1%, would reverse a 0.1% decline in March.

* Consumer Credit (not including real estate backed debt like mortgages) is expected to have declined by $3.9 billion in March on top of a $11.5 billion decline in February. This downturn has been unusual in the extent that consumer credit has declined as people try to restore their personal balance sheets.

 

 

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:

 

Drew Industries (DW) is expected to report EPS of $0.31, up from a loss of $0.34 per share a year ago.  Last time out, DW posted a positive surprise of 5.3%, and over the last month the mean estimate for its first quarter earnings is up 33.33%. DW has a Zacks #1 Rank.

 

Perkin Elmer (PKI) is expected to post EPS of $0.28, up from $0.26 a year ago. Last time, PKI beat expectations by 4.9%, and over the last month analysts have raised their estimates for the about-to-be-reported quarter by 0.44%. PKI is a Zacks #2 Ranked stock.

 

Sysco Systems (SYS) is expected to post EPS of $0.41, up from $0.38 a year ago. Last time out, the company beat expectations by 7.1%. Over the last month, estimates for the quarter are up 1.61%. SYS is a Zacks #2 Ranked stock.

 

Potential Negative Surprises

 

Centerpoint Energy (CNP) is expected to post EPS of $0.29 a share, versus EPS of $0.19 a year ago. Last time, they reported 10.0% below expectations. For this Zacks #5 Ranked stock, analysts have cut the estimates for this quarter over the last month by 2.05%.

 

Pepco (POM) is expected to earn $0.20 a share this quarter, up from of $0.17 a year ago. They were in line with expectations last time out. Analysts have cut the estimate for this quarter by 15.0% over the last month. The stock holds a Zacks #5 Rank.

 

Vulcan Materials (VMC) is expected to lose $0.37, versus a loss of $0.29 a year ago. Last time out, this Zacks #5 Ranked stock disappointed, but the amount could not be calculated since the expectations were for break-even and over the last month analysts have shaved their expectations for the quarter by 28.07%.

About the Author

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.

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