Earnings Take Center Stage Posted By : Dirk van Dijk

Earnings Preview 7/16/10


Earnings season will be in full gear next week. There will be 509 firms reporting, including 129 S&P 500 firms. The firms reporting are some of the biggest and most important bellwethers of the economy, and slice across a wide spectrum of industries.

Included in next week's line up are eleven of the Dow 30, including American Express (AXP), International Business Machines (IBM), Microsoft (MSFT), Johnson & Johnson (JNJ), Coca Cola (KO), AT&T (T), Verizon (VZ), 3M (MMM) and McDonald's (MCD). While it will not be definitive, by the end of the week we should have a pretty good idea about how the second quarter earnings season is going to shape up.

The focus will be very much on the earnings, as the economic data schedule is on the light side. The most important numbers will come on Tuesday when we get the Housing Starts and Building Permits data. Thursday brings the Index of leading economic Indicators, and as always the initial claims for unemployment insurance data. We will also get the existing home sales numbers on Thursday.

Monday

* No reports of significance.

Tuesday

* New housing starts are expected to have fallen to an annual rate of just 555,000 from an already dismal 574,000 in May. Each new home built generates a huge amount of economic activity. Normally, housing is the key locomotive in pulling the economy out of downturns. But given the huge oversupply built up during the bubble, and the massive inventory of existing homes -- especially the shadow inventory of homes that will end up in foreclosure -- that simply is not happening this time around. There is also a bit of a hangover from the end of the first-time home buyer tax credit.
* The best leading indicator of housing starts is building permits. There the situation is not expected to look much better, with permits expected to fall to an annual rate of just 563,000 from 593,000 in May.

Wednesday

* Nothing of particular significance.

Thursday

* Weekly initial claims for unemployment insurance come out. They fell 29,000 in the last week, to 429,000. That is the lowest weekly level since before the collapse of Lehman Brothers. 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 rise again next week. Last week?s decline was exaggerated by seasonal adjustments that assume that automakers take breaks this time of year to change models. They are not doing so this year. 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 adding enough jobs to make a dent in the unemployment rate. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but still have a ways to go.
* Continuing claims have also been in a steep downtrend of late. That trend was broken last week when they rose by 247,000 to 4.681 million. However, that is down 1.536 million from a year ago. Part of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Federally paid extended claims fell by 255,000 to 4.577 million. However, that is due to even the extended claims running out as a bill to further extend benefits has been stalled in the Senate. 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 9.002 million, which is down 8,000 from last week. The total number of people getting benefits is now 341,000 below year-ago levels. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
* The Index of Leading Economic Indicators is expected to have dropped by 0.5%, more than reversing a 0.4% increase in May.
* Existing Home Sales are expected to have fallen to an annual rate of 5.10 million from 5.66 million in May. Since existing home sales are recorded at closing, we will probably see some benefit still from the homebuyer tax credit, so the number could surprise to the upside in June, but then fall off a cliff in July.

Friday

* Nothing of major significance.

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:

Altera (ALTR) is expected to report EPS of $0.53 versus $0.16 a year ago. Last time out, ALTR beat the consensus by 25.0%, and over the last four weeks the mean estimate has edged up by 0.08%. ALTR is a Zacks #1 Ranked stock.

Apple (AAPL) is expected to report EPS of $3.07 versus $2.01 a year ago. Last time out, AAPL beat the consensus by 37.0% and over the last four weeks the mean estimate has gone up by 3.53%. AAPL is a Zacks #1 Ranked stock.

SanDisk (SNDK) is expected to report EPS of $0.86 versus $0.27 a year ago. Last time out, SNDK beat the consensus by 79.6% and over the last four weeks the mean estimate has gone up by 4.10%. SNDK is a Zacks #1 Ranked stock.

Potential Negative Surprises
Kimberly Clark (KMB) is expected to report EPS of $1.14 versus $1.16 a year ago. Last time out, KMB disappointed by 0.87% and over the last four weeks the mean estimate has fallen by 0.54%. KMB is a Zacks #4 Ranked stock.

T Rowe Price (TROW) is expected to report EPS of $0.61 versus $0.38 a year ago. Last time out, TROW disappointed by 1.72%, and over the last four weeks the mean estimate has dropped by 1.50%. TROW is a Zacks #4 Ranked stock.