Earnings Preview 3/12/10
Earnings Season is winding down, but that does not mean it is over. Next week will bring 112 earnings reports, but just 5 members of the S&P 500. Some of the higher profile firms to report will be Nike (NKE), Cintas (CNTS) and Discover Financial (DFS).
Instead of earnings reports, the focus will be on the economic data calendar, which starts out with industrial production, moves on to key housing data and then finally to inflation. In between, we have a Federal Reserve Board meeting. More than enough there to significantly move the markets.
Monday
• Industrial production is expected to have been unchanged in February after expanding by 0.9%. If the forecast is accurate, it will be the first time since June that the Industrial Production index did not decline. I suspect that the overall number will come in positive, but that much of the increase will come from Utility output which is very weather sensitive. Pay attention to manufacturing output, as well as overall output, because it is not as weather sensitive. Manufacturing output last dipped slightly in December, but is up 5.5% from the low reached in June.
• The same report on Industrial Production will also tell us about Capacity Utilization. This is a greatly underappreciated economic report and deserves far more attention than it usually gets in the press. The overall capacity utilization rate is expected to dip to 72.3% in February from 72.6% in January. The same weather-related caveats apply the Utilization numbers, as the overall figure includes Utility utilization. Also, look at the capacity utilization numbers for Manufacturing as well, which stood at 69.4% in January. Both overall and manufacturing capacity have been in a steep uptrend since June when they hit 68.3% and 65.2%, respectively. However, when the economy is normal and healthy, both levels should be in the 80% area, so we still have a long way to go.
• The Empire State Manufacturing Survey, one of the regional Fed indexes, is expected to drop to a reading of 23.45 from 24.91. Any reading over 0 indicates expansion, so the expected level will still indicate growth, just at a slower pace.
Tuesday
• Building Permits are expected to decline to a seasonally adjusted annual rate of 614,000 from 622,000. This is the best leading indicator of housing starts and thus residential investment. Normally, residential investment is the most important locomotive in pulling the U.S. economy out of recession, but it does not appear to be a very powerful locomotive this time. While Permits have rebounded from the low of 498,000 hit in April, they remain deeply depressed and the rebound appears to be stalling, and if the forecast is accurate it will be the second straight monthly decline. Just for perspective, from March 2004 through March 2006, building permits never went below 2.0 million.
• Housing Starts, like Permits, are expected to have dipped again in February, falling to an annual rate of 587,000 from 591,000 in January. Starts have been moving erratically higher since hitting an all-time low (since 1959) of 479,000 in April, but remain FAR below the peak of 2.273 million set in June of 2006. The anemic recovery in housing will keep the overall economic recovery slower than most recoveries, but given the enormous supply of used houses on the market (and in shadow inventory), it does not make sense to be building lots of new houses at this point.
• The Federal Reserve holds one of its regular meetings to decide the Fed Funds rate. The chances of them changing it from the current 0 to 0.25% range is extremely remote. More attention will be paid to parsing the words of the statement for any changes from last time. The key thing to look for is if the phrase “exceptionally low levels for an extended period of time” remains in the statement. There should also be some commentary about the completion of the program to purchase $1.25 Trillion of mortgage backed securities, which is now more than 98% complete.
Wednesday
• The Producer Price Index is expected to have declined by 0.1% in February, well below the 1.4% increase in January. However, the January increase was almost entirely a function of higher energy prices. The core PPI, which strips out Food and Energy prices, rose 0.3% in January and is expected to rise 0.1% in February. Inflation is well under control, and combined with the low level of capacity utilization is the reason that the Fed will keep interest rates low for the foreseeable future.
Thursday
• Weekly initial claims for unemployment insurance come out. They fell 6,000 in the last week, to 462,000. After a huge downtrend from mid-April through the end of 2009, initial claims started to rise again, up in 7 of the 8 weeks before rising in the last two weeks. Last week was some good progress, but not good enough. We probably need for weekly claims (and the 4-week moving average of them) to get down to near 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 625,000 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 4.558 million, up 37,000 from the previous week. Extended claims (paid from Federal ARRA funds) were 5.691 million, a decrease of 175,000. Those numbers might be distorted downwards the shenanigans of Senator Bunning, who held up an extension of benefits. Make sure to look at both sets of numbers!
• The Consumer Price Index is expected to increase by 0.1% overall in February after a 0.2% increase in January. Stripping out food and energy should also lead to a 0.1% increase after a 0.1% decline last month.
Friday
• Nothing of 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:
DSW Inc (DSW) is expected to report EPS of 0.31, up from a low of $0.14 per share a year ago (putting its "best foot" forward?). Last time out, DSW posted a positive surprise of 30.4%, and over the last month the mean estimate for its fourth quarter earnings is up 2.2%. DSW has a Zacks #1 Rank.
Perry Ellis (PERY) is expected to report EPS of $0.59, up from a loss of $0.34 a year ago. In the 3Q, PERY posted a positive surprise of 29.2% and over the last month, the consensus estimate for its 4Q earnings is up 4.0%. PERY is a Zacks #1 Ranked stock.
Potential Negative Surprises
Cintas (CTAS) is expected to post EPS of $0.30 a share, versus $0.47 a year ago. Last time they reported 7.1% below expectations. For this Zacks #4 Ranked stock, analysts have cut the estimates for this quarter slightly over the last month by 21.9%.
Palm (PALM) is expected to lose $0.41 a share this quarter, down from the $0.88 they lost a year ago. They reported in line with expectations last time out, but analysts have cut the estimate for this quarter by 70.4% over the last month. The stock holds a Zacks #4 Rank.
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 www.zacks.com.
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