NEW YORK (CNN/Money) -
Company analysts expect great things from earnings in the quarters to come, but that is hardly a surprise. They're always expecting great things.
What's the source of this bullishness? Cynics will complain that, even after all that's happened, the analysts are still a bunch of toadies trying to drum up business for their firms.
But it may stem from a simpler source: The analysts genuinely like the industries they cover -- that's what attracted them in the first place. As a result they're still a little wide-eyed about the companies that they cover. There's really something sweet about that optimism.
Wall Street strategist types, on the other hand, who look at profit indicators across sectors and keep watch over how the economy is doing, tend not to have such rosy views. Next year for instance, company analysts expect S&P 500 earnings to be 7.8 percent higher than the strategists do.
But it's noteworthy that some of the big-picture types have, thanks to the strength of earnings in the current, second-quarter reporting season, been bumping up estimates. The latest was Citigroup economist Stephen Wieting, who on Thursday lifted his firm's 2003 and 2004 estimates.
The strength of earnings in the first half of this year was surprising, Wieting said, given how slowly the economy grew, and signaled that companies are running quite lean. That puts them in a great position if economic growth accelerates and sales improve in the second half of the year, as Wieting thinks they will.
As investors plough through the last big week of the second-quarter earnings season, they may have good things to look forward to.
Companies in this report: American Express, DuPont, McDonald's, Tyco, Aetna, Monster Worldwide, Exxon Mobil, Procter & Gamble, Walt Disney.
American Express: Posted
The New York-based company, the nation's biggest corporate travel agent and the No. 3 credit card issuer, said its second-quarter earnings rose to $762 million, or 59 cents per share, from $683 million, or 51 cents, a year earlier. Wall Street analysts on average expected 57 cents.
Revenue rose 7 percent to $6.36 billion from $5.95 billion. (see more)
Dow component American Express has seen strength return to its stock after a bad bout during 2001. Shares of the company have done especially well in the last few months, rising about 42 percent since early March.
The company continues to make strides to bring earnings back to levels seen before the Sept. 11 terrorist attacks, which caused a slowdown in business travel and other business-related expenses. Analysts will be looking at the company's business travel division for signs of a continuing rebound in the sector.
Because most of its customers cannot carry a balance, Amex has not been hit as hard as some of the other credit card companies by the fact that interest rates are near 45-year lows. But, one of its cards, the Optima, does allow customers to roll balances into a loan, and the company could benefit if rates rise as the economy improves.
Amex has been putting increasing emphasis on its other non-travel and retail-related businesses. It has said its Global Network Services unit, which forms partnerships for its credit cards, will continue to be a growth driver. The company has expanded testing of its ExpressPay system where cardholders can pay for goods with the swipe of a key chain attachment. It also recently launched a new card in Latin America and the Caribbean.
Amex could stand to benefit from a host of new opportunities if the banks currently fighting Visa and MasterCard over exclusivity rights win. The company has also pursued other ways to expand its business -- including offers to buy U.K.-based Threadneedle Asset Management Holding in June, and Rosenbluth International (a smaller competitor in the travel business) -- last week.
Why it matters: Financial issues generally lead an economic recovery, and investors will be looking to Amex and other financial services companies for signs that their businesses are continuing to do well or improving.
DuPont, Tuesday a.m.
Although economists are starting to see small signs of a recovery in manufacturing and beyond, that optimism hasn't meant much to the chemical industry, which continued to suffer in the second quarter due to lethargic demand and the high cost of raw materials.
DuPont had a profitable first quarter, reversing a year-earlier loss that stemmed from an accounting change. But the profit resulted from cost cutting and the impact of a lower tax rate, not real growth. Also, the impact of higher commodities prices and lower demand was not fully felt by some of the chemical makers in the first quarter, because they had stockpiled in anticipation of the war in Iraq.
But the second quarter is a different story. Higher oil prices were somewhat abated by the end of the Iraqi war, but not to the extent analysts had been predicting. Rocketing natural gas prices also found little relief.
Such an environment makes it hard for DuPont to raise prices and stay competitive. Increased pension funding costs have also taken their toll on the Dow 30 member's bottom line.
On the upside, the weaker dollar likely helped DuPont's results, due to the large portion of its business that is dependent on international sales. The stock's price has held up, gaining 7.2 percent in the quarter and 17.6 percent since the market bottomed on March 11.
Why it matters: When the economic recovery does finally get underway on a global level, chemical companies will be among the first to confirm it. Companies like DuPont provide a variety of materials to manufacturers and therefore tend to be among the early beneficiaries of a pickup in production.
Even though all signs point to a weak quarter in terms of earnings and revenue, any indication from DuPont management that demand is improving would be important for its broader economic implications.
First Call forecast: 57 cents a share versus 71 cents a year ago.
McDonald's, Tuesday a.m.
McDonald's has been struggling with growing competition and has been engaged in a price war with No. 2 hamburger seller Burger King since late last year.
But in January, CEO Jim Cantalupo took the reins and has since made aggressive moves in an attempt to re-focus the company. McDonald's recently launched more healthy menu items, like salads and choices of milk and fruit in its kids-oriented Happy Meals. It has also begun to establish wireless Internet connections its urban restaurants and it is testing new kiosks as a way to speed payment.
Some of these efforts may already have begun paying off. The stock has risen nearly 74 percent since it hit a low in March. The company managed to beat analyst forecasts in the first quarter -- and to return to profitability after posting its first net loss in the fourth quarter of 2002. Its June sales at restaurants open more than 13 months rose 2.1 percent, boosted by the new, healthier, menu offerings.
As talk of Americans' obesity grows -- and the general population migrates to healthier food choices -- McDonald's seems to be showing it can adapt. Industry watchers will be looking at the company's sales of salads and healthier items, as well as its margins, expecting to see follow-through. There also is talk McDonald's may raise its dividend.
Why it matters: After all of the cost cutting and its return to profitability in the first quarter, the company needs to prove that it has turned a corner and can stay on track. Another slip into the red could cause major havoc for the fast food chain's stock. Improved sales also could be a sign of stronger consumer confidence and an improving economy.
First Call forecast: 37 cents a share versus 39 cents a year ago.
Tyco, Tuesday a.m.
Sure, its stock has moved higher this year, but Tyco is still a fallen giant.
More than a year after the former CEO Dennis Kozlowski left the company amid allegations of tax fraud, questions continue to swirl about the formerly high-flying conglomerate. Although new headman Ed Breen has taken steps to clear up the accounting issues that dogged Tyco, and has cleared many top members of the old regime out of the company, some contend that he hasn't done enough.
The thing that sticks in the critics' craw the most? At the end of last year, Breen signaled that the clean-up work at Tyco was over. Then the company took a big charge in the calendar first-quarter to fix newly discovered problems in its books. In June, the Securities and Exchange Commission asked Tyco to restate results back to 1998.
It's all very odd, because, in the words of Gimme Credit analyst Carol Levenson, "this company ought to be purer than Caesar's wife if it wants to regain investor credibility." When Tyco reports results, Wall Street will be just as interested in what kind of broom work Breen is doing as in the company's profits.
Why it matters: Tyco gives off a fine read on the health of the industrial economy, but the real focus here is on what the company will do to regain the market's trust. Accounting concerns, though not front and center anymore, are still very much on investors' radar screens. If Tyco were to truly wipe its slate and become an example of how to be squeaky-clean with your books, it would help restore investor confidence not just in it, but in Corporate America at large.
First Call forecast: 35 cents a share versus 45 cents a year ago.
Aetna, Wednesday a.m.
With the exception of Cigna, which has its own specific problems, profits at HMOs have surged in 2003, pointing to stellar results for the second quarter and the second half of the year.
Medical costs soared over the last six years, but for the last year, and particularly the first two quarters of 2003, they have been rising at a slower-than-expected pace, due to sluggish admission growth at hospitals. Additionally, co-payments individuals make to pharmacies or physicians' offices have been rising and should continue to do so through 2004. Premiums individuals pay have gotten steeper, too. As a result of this wider-than-expected spread between costs and payments, HMOs profits are thickening.
Aetna suffered in 2000 and 2001 due to unprofitable enrollment and poorly managed expenses, not to mention a contentious relationship with the medical community. It's still struggling with the aftermath of this, but new management and aggressive cost cutting have helped tremendously. Aetna posted stronger-than-forecast earnings per share and raised its current-quarter and full-year forecasts in both the fourth quarter of 2002 and the first quarter of 2003.
In recent days, analysts at Banc of America Securities and Morgan Stanley raised their 2003 and 2004 forecasts on Aetna, saying it is in the process of regaining its place as a strong competitor and should be able to capture additional market share in the next few years.
Why it matters: The No. 4 HMO has shown more dramatic growth than its competitors in the first half of the year and, as a result, its earnings will be looked at as a harbinger for the industry.
The impact of corporate layoffs on profits for the entire industry should not be understated. Massive layoffs have cut into hospital admissions, which are expected to remain flat over the next year. In addition, with so many people out of work and strapped for cash, non-essential medical procedures or specialist visits are being postponed, a trend that is likely to continue in the near-term.
First Call forecast: $1.02 per share, versus 32 cents a year ago.
Monster Worldwide, Wednesday p.m.
Lately, Monster Worldwide has been a monster of a stock.
Shares of the company, which until recently held the much tamer moniker of TMP Worldwide, have more than doubled since the end of last year. Not bad for an outfit whose sales have been slipping since 2001 and are expected to continue to drop through the end of next year.
No surprise there. Two of the firm's major divisions are closely tied to the struggling labor market: Monster.com is the leading online classified ads site; advertising and communications focuses on "human resources solutions." The third major division, directional marketing, is the world's biggest Yellow Pages advertising agency. Unfortunately, when companies cut back on hiring they tend to also cut back on ad buys.
When it reports, investors will want to know whether Monster has seen an inkling that business will start to grow again. If not, it will be hard to justify the rally in the stock.
Why it matters: No, Monster is by no means a major company for Wall Street, but the message that its results convey is of major importance. Until its revenues stabilize it will be hard to say that companies are back to hiring and spending again. And until companies hire and spend again, it will be hard to say the economy is in the clear.
First Call forecast: 8 cents a share versus 14 cents a year ago.
Exxon Mobil, Thursday a.m.
Higher crude oil and natural gas prices and a better market for fuel refining sent the profits of oil companies surging in the first quarter.
Fears about oil production disruption in the months leading up to the start of the Iraq war in March pushed crude prices to just below $40 per barrel, while concerns about inventories sent natural gas prices to just below $12 per million British thermal units.
As a result, No. 1 oil company Exxon Mobil reported a record first-quarter profit that tripled from a year earlier -- its best quarter since the former Exxon became Exxon Mobil in 1999.
The second quarter looks to be a pretty bang-up one too, with analysts expecting Exxon and its rivals to post strong year-over-year profit increases -- aided in addition by the weakness in the U.S. dollar.
However, on a quarter-over-quarter basis, Exxon is forecast to show a slight decline in profit due to the fact that commodity prices have dipped since the end of the war and the winter. The cost of oil is down 15 percent and gas is down 50 percent. Yet, prices remain extremely high on a historical level, surprising analysts who had been looking for a bigger drop after the end of the war.
Exxon's profits are protected somewhat regardless of price trends, in that the business functions in such a way that when one segment is down, it can sometimes benefit another. So, for example, even though a slide in oil and gas prices hurts, it is partially offset by the fact that the company can now produce jet fuel for less, because of the cheaper raw materials.
Why it matters: Oil and gas prices are still high and this continues to burden consumers and add to the sluggishness of the economic recovery. What Exxon has to say about volume and demand for its products will be significant. If the company says that volume has been increasing, that would be a good sign that businesses and consumers are starting to spend more.
First Call forecast: 56 cents per share, versus 39 cents a year ago.
Procter & Gamble, Thursday a.m.
The maker of Crest toothpaste, Tide laundry detergent and Pampers diapers has been a consistent performer throughout the economic downturn.
Since 1998, P&G has improved its earnings each quarter compared to the same period in the previous year all but one time, in which it matched the prior year's profit. The company's stock price has gained more than 12 percent since its recent March low, and is up more than 4 percent so far this year. Although this may be small compared to gains in the overall market, consumer goods issues tend to remain fairly steady during up and down swings.
Last week P&G said it was looking for a buyer for its Sunny Delight and Punica units as a way to exit the juice business -- in a move to refocus on its core product areas. The company said the brands had seen flat or declining sales. The company is still waiting for the European Commission's review of its $7 billion takeover of German hair care maker Wella.
In July, P&G raised its annual dividend, for the 48th year in a row, by about 11 percent. Analysts will be looking for signs as to whether fluctuations in foreign currency have affected the company's earnings abroad. About 25 percent of its business comes from Europe alone.
Why it matters: P&G and others in the consumer staples business have proven to be a safe place for people to put their money during the most recent downturn, but when the economy starts to recover the stock could lose much of its attractiveness. Analysts also will be looking at volume numbers for the company's higher-end goods. If sales have improved, it may mean that consumers are starting to spend more, indicating an economic recovery may have begun.
First Call forecast: 86 cents a share versus 77 cents a year-ago.
Walt Disney, Thursday p.m.
After getting hammered down badly by the bear market, shares of Disney have easily outpaced the overall market.
It's not hard to see why. The company's major divisions -- theme parks, movies and broadcasting -- are all heavily dependent on a buoyant U.S. economy. With optimism mounting that the worst has really passed and recovery is upon us, it makes sense that shares of the Mouse have been scurrying higher.
Further cheering the market, the company has been shedding non-core assets, selling its Anaheim Angels baseball team in May and shopping its Mighty Ducks hockey team. Meanwhile, the box office success of "Finding Nemo" and "Pirates of the Caribbean" has washed away the bitter taste last year's disastrous "Treasure Planet" left in investors' mouths.
If Disney has a problem, it may be that investors expect too much of it. The company's stock trades at a price-to-earnings ratio of 37. It's the sort of valuation that suggests, first, that the economy will see a robust recovery and, second, that Disney will be able to capitalize on it. If things don't pan out, this stock could end up slipping investors' portfolios a mickey.
Why it matters: Disney may be the best sentiment indicator out there. Attendance up at Disney World? Consumers' jitters over the economy -- and the threat of terrorism -- must have been damped. Broadcasting revenues higher? Companies are willing to shell out money on advertising again. If this company does well, it may mean that the gloom has really lifted.
First Call forecast: 16 cents a share versus 17 cents a year ago.