NEW YORK (CNN/Money) -
Best earnings season in a decade. Ho-hum.
No, investors haven't exactly met the news that the fourth quarter was an absolute blowout for profits with glee. Since earnings started coming out stocks have made only middling gains. Techs, which have had the best results by far, have lagged the market.
A case where the good news had already been "priced into" stocks, clearly. Everybody knew business was good in the fourth quarter, and everybody knew that companies and analysts alike were low balling what earnings would look like.
There may be good news yet, however. Although investors figured out how good earnings would be in the fourth quarter a while back, they may not have reckoned on how good the current quarter is looking. Indeed, the economy appears to have accelerated coming into this month, and analysts' first quarter earnings expectations look remarkably low.
Companies in this report: American Express; McDonald's; Caterpillar; Amazon.com; Time Warner; United Parcel Service; Exxon Mobil.
American Express, Monday during trading hours
In the first half of 2003, the No. 3 credit card issuer and leading corporate travel agent was hit by SARS worries and the Iraq war, but by most accounts, American Express' (AXP: Research, Estimates) second half was stellar.
A fast-growing U.S. economy and ascendant stock market have been good for its business, boosting consumer spending and reducing the negative impact of delinquent borrowers. Its third-quarter earnings per share rose from a year earlier and topped estimates and the fourth quarter is expected to have been good as well.
UBS Warburg recently upgraded the stock to "buy" from "neutral," saying that the company should see a solid 2004 due to a number of likely supportive factors: the continued strength of the economy, higher credit card use as the refinancing boom pulls back a bit and consumers are less flush with cash, and the likelihood that consumers will be able to pay down more of their debt this year than in 2003, particularly if the lagging job market finally picks up.
Why it matters: With consumer spending having been on the mend for some time, the next wave of the economic recovery is business spending. All kinds of companies have given bullish forecasts on their spending and that of their customers. Confirmation of this second wave should be evident in Amex's bottom line and it what it has to say about the coming quarters, which would in turn confirm the durability of the recovery.
First Call forecast: 59 cents per share versus 52 cents a year earlier.
McDonald's, Monday p.m.
After struggling through an extended rough period, McDonald's (MCD: Research, Estimates) seems to have turned over a new leaf.
The company shed many of its smaller, non-core businesses in an effort to focus its resources on the essential: its worldwide chain of hamburger restaurants. McDonald's has also taken steps to make itself more competitive in an increasingly health-conscious market by offering a wider variety of salads and other low-fat and low-calorie fare.
The downside to these structural changes is that they bring a number of fourth-quarter charges, which will substantially reduce the company's quarterly earnings. However, analysts say what's more significant is what McDonald's has to say about its business in 2004, when the financial impact of all these structural changes will start to be felt.
The first reported case of Mad Cow disease in the United States seems to have had virtually no impact on the company's December sales and only a temporary, short-term impact on its stock price. December sales at stores open a year or more rose more than 12 percent from a year earlier, the ninth consecutive month of such gains.
In addition, McDonald's has benefited from the weakness of the U.S. dollar versus the euro, as approximately half of its revenue is derived from its international business.
Why it matters: With chains in at least 121 countries, McDonald's is a proxy for consumer spending and for the economic recovery, so it better have very upbeat things to say, particularly about its international business, which has not snapped back with quite the same ping as its U.S. business.
Just because the U.S. Mad Cow scare hasn't been a factor yet doesn't mean it won't be. The company's international business is still feeling the impact of the global Mad Cow scare of years past.
First Call forecast: 35 cents per share versus 25 cents a year earlier.
Caterpillar, Tuesday a.m.
In 2003, Caterpillar's (CAT: Research, Estimates) experienced something of a metamorphosis. Buoyed by an earnings rebound and growing optimism over a recovering world economy, the machinery company's stock rose by 82 percent, leaving its all-time highs of 1999 far below.
The way things look now, good things could keep happening for Cat in 2004. Surging agricultural commodity prices should lift demand for farm equipment, while a weakened dollar gives the company an edge over its overseas competitors. Meantime, this past summer's big blackout in the Northeast may up give a boost to Cat's generator business and construction equipment sales could improve on the back of a recovery in the commercial real estate sector.
If there is a problem, it is that with a price-to-earnings ratio of around 27, Cat's shares have rarely been so expensive. The news will need to be good indeed to justify such a steep valuation. When it reports, investors will be paying close attention to the company's outlook for 2004 as well as what incoming CEO James Owen's plans for the future are.
Why it matters: You want to know how businesses around the world are faring, take a look at Caterpillar. The better the economy is, the more ditches they dig. The more ditches they dig, the more they buy from Cat.
First Call forecast: 94 cents a share versus 88 cents a year ago.
Amazon.com, Tuesday p.m.
Amazon.com (AMZN: Research, Estimates) said it had its "busiest holiday shopping season ever" in 2003, during which it set a one-day record of over 2 billion units ordered. The online retailer's sales for the quarter are expected to increase to $1.8 billion, up about 29 percent over the same period last year. Analysts don't doubt the company will post a pretty good overall operating performance for the year. They want to know what's next.
With competition nipping at its heels, Amazon made some noticeable decisions last year in a bid to boost revenue growth. It stopped marketing on TV, lowered shipping costs and adopted free-shipping promotions. Eugene Walton, analyst with Walton Holdings, said he's curious to hear what else Amazon has up its sleeve, particularly since competitors like Barnes & Noble and Buy.com have moved quickly to duplicate Amazon's free shipping and low product pricing.
Separately, valuation concerns haven't gone away. Shares of Amazon currently trade at 63 times 2004 earnings estimates. The feeling on Wall Street is that Amazon needs further innovation if it wants to stay ahead of the competition and justify these lofty multiples.
Why it matters: The stakes are higher for Amazon now that it's shown two consecutive years of profit growth. Given Amazon's bellwether status in the e-commerce industry, strong results could signal growing momentum going forward not just for Amazon but for the industry as a whole.
"If the numbers are better than expected, Wall Street will assume Amazon can grow faster in the future and that bodes well for the bottom line," said Safa Rashtchy, analyst with Piper Jaffray. "It would also means consumer spending, especially in the online retail arena, is holding up well."
First Call forecast: 29 cents a share versus 19 cents a year earlier.
Time Warner, Wednesday a.m.
Time Warner's (TWX: Research, Estimates) fourth quarter results have got to be an improvement over last year when it reported a staggering $44.9 billion loss on its way to a record full-year loss of $98.7 billion, due to another huge charge for the shrinking value of its America Online unit.
Since then the company has shed many things, including AOL from its name and stock symbol, its chairman, AOL co-founder Steve Case, its vice chairman, Ted Turner, the company's largest individual shareholder who sold much of his stake Time Warner early in the year. The company also sold off several divisions it considered non-core assets in an effort to cut debt.
This effort has been relatively successful. Time Warner's chief financial officer said last month that net debt, which is long-term and short-term debt less cash and cash equivalents, is expected to be $20.5 billion once the company closes its deal to sell Warner Music for $2.6 billion sometime in the first quarter. That's down from $25.8 billion at the end of 2002, and is approaching the target the company originally set for the end of 2004.
Despite the success in cutting debt, the company, whose units include CNN/Money, saw some challenges. Time Warner isn't seeing the same overall rebound in ad spending as other media companies, due to weak advertising at its AOL and cable units. And it's had a mixed box office season at its movie studios.
After falling below $10 a share in February, the stock posted a better than 50 percent gain over the next six months. But the growth has slowed since and the First Call consensus target price is now $20, only about $1 below current levels. Analysts have been tweaking earnings forecasts slightly lower in recent days. In fact, earnings excluding special items are expected to fall below last year's.
Why it matters: Investors will once again be looking at results for the America Online unit, which continues to lose subscribers and ad revenue. Its income and revenue will both end the year lower. The company is a year into a major turnaround effort at the unit and investors will soon want to see the fruit of that effort or a sale of the unit to essentially undo the 2001 merger. And the federal investigation into accounting practices at AOL continues to dog the company, putting its effort to have a public offering of a minority stake in its cable television unit on hold.
First Call forecast: 15 cents a share, versus 28 cents a year earlier.
United Parcel Service, Thursday a.m.
It's hard to imagine a scenario where United Parcel Service (UPS: Research, Estimates) delivers fourth-quarter results that are anything but good.
Not after the holiday shopping season we just went through, which saw a huge surge in online sales. Surely you noticed that the boys and girls in brown seemed a tad busier this year? Maybe even a bit stretched? When it comes to ground shipping UPS is second only to the post office, and for many online businesses it's the ground shipper of choice.
Which isn't to say that absolutely everything is well and good. Competition in the small package business is fierce and if corporate customers get fed up with UPS's service (anecdotally, one hears reports of this) there are plenty of other options. The newly formed ABF/DHL has said it would like to up its share of the ground market substantially. FedEx's recent acquisition of Kinko's will give it access to the small businesses market that UPS will find difficult to match.
Why it matters: The paradox of a world that has become, through technology, increasingly connected is that it is, in a sense, increasingly remote. Every year we buy more online, every year more people work from home and more companies outsource what they used to do in-house. That all adds up to more small-package shipping. You want to track how this transition is progressing, track what's happening at UPS.
First Call forecast: 69 cents per share versus 59 cents a year ago.
Exxon Mobil, Thursday a.m.
Oil prices were stubbornly high last year and have lately risen to highs not seen since the Iraq invasion, but this has done little for the shares ofExxon Mobil (XOM: Research, Estimates), which have lagged behind the overall market.
Why this is so remains something of a mystery. Maybe it's because so many people expect oil to come down in price -- analysts surveyed by First Call think that West Texas Intermediate crude will fall below $27 a barrel by the end of the year from the current $35 or so. Or maybe it's because betting on energy stocks going up is seen as tantamount to betting that the rest of the market is going to go down.
Regardless of what investors think, Exxon apparently believes its stock is a steal. In the third quarter it bought back $1.7 billion in common shares. The company spent $3 billion in capital expenditures -- not the sort of behavior you'd see from a company that expects oil prices to suddenly slip.
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Why it matters: The world's need for energy is growing and there are questions whether a maturing resource base and aging infrastructure will be able to adequately meet that demand. Because it has its hands in so many of the energy industry's pots (oil, natural gas, refining), Exxon is well placed to gauge how acute the strain on supply is.
First Call forecast: 58 cents per share versus 56 cents a year ago.