| Commentary | |
Can't wait for Alcoa!
The latest round of earnings reports kicks off today. Alcoa's profits, like those of many other companies, will be bad. But hopes for a profit recovery are building.
NEW YORK (CNNMoney.com) -- Ahh. April is here. T.S. Eliot's cruelest month. He wasn't referring to the deluge of bad earnings reports we're likely to see in the next few weeks. But he might as well have.
Dow component Alcoa (AA, Fortune 500) kicked off the first quarter earnings parade this afternoon. And the numbers weren't good. Sales and profits fell from a year ago.
Rising aluminum prices did not offset broader economic weakness. Some of Alcoa's biggest customers are in the struggling automotive and construction industries.
But Alcoa's stock has soared in the past few months on the hopes that the worst might be over. More about that later.
First, the bad news about the year so far. This will probably be a brutal quarter for many companies. According to earnings tracker Thomson, profits for the S&P 500 are expected to fall 12.6%, marking the third consecutive quarter of earnings drops for the broader market.
The last time earnings suffered such a bad patch was during the last recession. Earnings fell for five straight quarters throughout 2001 and the the first quarter of 2002.
Banks battered, oil energized
To be sure, much of the earnings weakness is confined to one sector: financials. Earnings in this group are expected to plunge 61% from a year ago as many big mortgage lenders, banks and brokerages will be taking multi-billion dollar writedowns due to exposure to bad subprime loans.
Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are both expected to report sizable first-quarter losses next week, and analysts are predicting substantial drops in profits for Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500).
Excluding the financial arena, profits for the remaining nine sectors in the S&P 500 would be up 7.2%, according to Thomson. However, there is a caveat here as well.
The only industry that you can truly say is doing well is energy. This should come as no surprise with oil prices at more than $100 per barrel. Earnings for energy companies are expected to soar 28%.
So if you remove both the best and worst groups, you're left with a market and economy that is muddling along. Many consumer discretionary companies - retailers, homebuilders and auto manufacturers - are also facing a tough time as consumers pull back on spending.
The entire consumer discretionary group is expected to report an earnings drop of 12%, according to Thomson. Retailers Circuit City (CC, Fortune 500) and Rite Aid (RAD, Fortune 500) are both forecast to report quarterly losses later this week.
And earnings for utilities, materials, health care, industrials and telecoms will likely be relatively flat in the quarter - with expected earnings growth in the low-to-mid single digits.
In other words, there's nothing to get overly excited about. But the woeful first-quarter results are already priced into this market. The S&P 500 has fallen nearly 7% year-to-date.
A rebirth for earnings
Now the good news: Some companies are going to do well, especially big companies that have diversified outside the United States. They are taking advantage of both a weak dollar and economies abroad that are growing more rapidly.
Conglomerate General Electric (GE, Fortune 500), for example, will report its first-quarter results Friday. And unlike many other companies, it's expected to post solid numbers: sales growth of 9% and earnings growth of 16%
"GE shouldn't have any huge surprises. Overseas is great and domestic is not," said Ed Yardeni, president of Yardeni Research, an investment strategy firm. "But investors should listen to [CEO Jeffrey] Immelt's message. Companies that are becoming increasingly global deserve to trade at higher valuations because of that fact."
The outlook for the remainder of the year may also be surprisingly good.
"That will be one of the key things to keep an eye on, guidance going forward," said John Butters, director of U.S. earnings research for Thomson Financial.
To that end, some investors appear to be betting that Alcoa's guidance could be rosy because of increasing commodity prices and hopes that the economy may bounce back in the second half of the year. Shares of Alcoa have surged 46% since hitting a 52-week low in January.
In fact, the broader market has enjoyed a nice pop in the past few weeks following the Federal Reserve's last interest rate cut and the bailout of Bear Stearns.
"The market is trading as of late as if investors are looking beyond the credit crisis and beyond the recession, as though the economy and earnings should be better in the second half of the year," said Yardeni.
With this in mind, Yardeni said that as long as guidance for the remainder of 2008 isn't too negative, that would be seen as a good sign for the markets and economy.
Analysts currently expect profits to fall again in the second quarter, once more weighed down by poor performance from financials. But Butters said earnings in the third quarter and fourth quarter should show sharp gains because of easy comparisons to the end of last year.
So don't fret the bad first-quarter numbers. Hopefully, guidance for the latter half of the year will keep the market heading higher as investors look beyond the recession and ahead to a recovery.
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