Profits have enjoyed a spectacular run the past four quarters, but that's almost over; what's next?
July 9, 2004: 12:16 PM EDT
By Mark Gongloff, Paul La Monica and Chris Isidore, CNN/Money staff writers
NEW YORK (CNN/Money) - Even as Wall Street prepares for another quarterly earnings party, some workers are folding up chairs and popping balloons as the outlook for profits just gets tougher from here.
Second-quarter earnings season begins in earnest next week, and analysts expect year-over-year profit growth among S&P 500 companies of 21 percent, according to earnings tracker First Call.
That would mark the fourth straight quarter of growth above 20 percent in what has been a particularly bountiful period for corporate America.
Unfortunately, it may also be the last stage.
"We expect profit growth to decelerate in the second half of 2004," Abby Joseph Cohen, chair of Goldman Sachs' investment policy committee, wrote in a note to clients this week.
"More challenging year-on-year comparisons, increasing costs related to energy, labor and financing, and a more muted benefit from a falling dollar will all contribute to the deceleration," she added. "This may begin in the second quarter in some sectors."
She and other analysts hasten to add, however, that this doesn't mean earnings will fall off the table. Rather, their acceleration will end and they will, hopefully, hold at a nice cruising speed.
Citigroup senior economist Steven Wieting, in a note to clients Wednesday, said he expected earnings growth in the S&P 500 to slow to 6.9 percent next year, though, obviously, some sectors will do better than others.
Among these late-blooming sectors, according to Citigroup research, are information technology and industrials. Sectors such as health care, materials and consumer discretionary stocks should grow earnings slightly faster than the broader S&P, while energy, financials, telecom services and utilities will underperform.
Until then, enjoy the party.
Here's a look at the earnings that matter next week: Johnson & Johnson; Intel; Nokia; Citigroup; Manpower; Southwest Air and IBM.
Johnson & Johnson, Tuesday a.m.
The drug and consumer products company makes everything from heart stents to Band-Aids to Tylenol and prescription drugs, which accounted for nearly half of its worldwide sales of $41.8 billion last year.
J&J has enjoyed steady revenue and earnings growth since 1999 and analysts forecast that EPS growth through at least 2006.
But there are some concerns, especially the growing risk of competition from generic brands. Patents protecting drugs that generated nearly a third of its 2003 pharmaceutical sales are due to expire by 2007. Bear Stearns analyst Rick Wise estimates that in the next two years alone generic competition could put $400 million to $2 billion of sales at risk.
J&J's pipeline is also a bit thin, analysts say. But with a continuing trend of consolidation within the drug industry there are some who believe that J&J, with a healthy balance sheet and a need for new growth areas, is a likely buyer in the next round of mergers.
Why it matters: Competitor Pfizer's inclusion as the third drugmaker in the Dow shows the growing importance of pharmaceuticals and health care to the economy. J&J's results will offer a broad glimpse on how the sector is doing.
First Call forecast: 79 cents, up from 70 cents a year earlier.
Intel, Tuesday p.m.
Investors are starting to worry that corporate and consumer spending on technology is slowing after a strong finish last year and start to 2004. And that's dragged down tech stocks.
Is the PC replacement cycle over already? Didn't it just begin? Intel, the world's largest maker of computer chips, can help assuage investors' fears with a strong second-quarter earnings report.
But that quarter is typically weak for techs so investors will be hoping for higher third-quarter guidance.
In addition, Wall Street will pay close attention to whether Intel has a firm handle on inventories. An inventory spike in the first quarter reminded some investors of the last big tech downturn. Before the tech bubble burst, many companies built inventories to unreasonable levels and when demand cooled, got left with a glut of unsold equipment.
Why it matters: If Intel issues a rosy forecast, that could be a sign that the back-to-school shopping season might be stronger than expected and that businesses still see a need to upgrade equipment.
Obviously,good news from Intel would probably lift the stocks of chip equipment makers like Applied Materials and Novellus Systems, hardware firms Hewlett-Packard and Dell and software makers Microsoft and Oracle.
First Call forecast: 27 cents a share versus 14 cents a year ago
Nokia, Thursday a.m.
It's Bizarro World in the cell phone business lately. Investors, long accustomed to solid numbers from market share leader Nokia and disappointments from Motorola, have seen their roles reversed in 2004.
Motorola's clamshell flip-phones have been selling like hotcakes but Nokia has stumbled, losing market share to not just Motorola, but to Samsung, Siemens and LG of South Korea.
Can Nokia get back on track in the second half of the year? The company unveiled several new clamshell models last month, raising hopes its woes were a blip.
Why it matters: Analysts have said Nokia's woes are not a sign of slowing cell phone demand. But it's always troublesome when the market leader is struggling. If nothing else, Nokia's problems could have a negative impact on its biggest suppliers, chip firms Texas Instruments and RF Micro Devices.
Perhaps more worrisome: Nokia's pledged to try to win back lost market share, which could lead to a price war.
First Call forecast: 18 cents a share versus 16 cents a year ago.
Citigroup, Thursday a.m.
Like a fickle pop diva, Citigroup (C: Research, Estimates) has filled newspapers and Wall Street gossip columns with stories of rumored romances and would-be partners jilted at the altar.
One minute it was said to be eyeing troubled New York Community Bancorp (NYB: Research, Estimates), then it was supposed to be courting Washington Mutual (WM: Research, Estimates), the thrift recently deviled by higher interest rates. Instead, last week, it bought an electronic-trading firm, Lava Trading.
Meanwhile, Citi was shuffling Asian partners, dumping its stake in Taiwanese conglomerate Fubon Financial and selling a chunk of its stake in Japanese securities firm Nikko Cordial Corp.
All this made for juicy headlines, but what's really important is how Citi's been handling higher interest rates. The Fed only recently started raising its target for a key overnight lending rate, but stocks have suffered and other market rates have risen pre-emptively, making life tougher for financial firms.
Of course, Citigroup still ruled stock- and bond-underwriting in the second quarter, according to Thomson Financial, but bond fees shrank, and analysts expect more pain as rates rise even further.
Why it matters: Financial stocks are the biggest component of the S&P 500, at 22 percent of the total index. And financial-sector profits make up some 40 percent of all corporate profits, according to a recent study by Jim Bianco of Bianco Research, a private analysis firm.
Of all financials, Citigroup is the biggest, so it's the biggest company in the biggest sector in the stock market. If Citigroup tells of trouble in the quarter or forecasts choppy waters ahead, investors may not just dump financials to avoid the pain. They may cut their exposure to the broader market, as well.
Keep an eye on Merrill Lynch (MER: Research, Estimates) as well, reporting Tuesday before the opening bell.
First Call forecast: 97 cents per share, versus 83 cents a year ago.
Manpower, Thursday a.m.
Of all the economic data Wall Street studies obsessively, nothing matches jobs numbers for pure clout.
The government report on the first Friday of the month can set the tone for economic analysis for the rest of the month, driving expectations about rates, consumer spending, corporate earnings and the fate of political powers.
Milwaukee-based staffing agency Manpower (MAN: Research, Estimates) puts out some closely watched jobs numbers of its own in a quarterly survey of employers' hiring intentions.
But the company's performance can also be a barometer of the labor market's health. While the rest of the stock market has been down in the dumps, thanks to worries about higher rates, Manpower's stock has risen steadily on news that the economy has added more than a million jobs since March.
But the stock was stung by a disappointing June jobs report. So investors will look to Manpower's results for some happier news about staffing demand in the just-ended second quarter, as well as optimistic comments about quarters to come.
Why it matters: People who have jobs -- including President Bush -- will be looking for some assurance that they'll keep them. People who don't have jobs will be looking for signs their prospects are about to turn up.
First Call forecast: 52 cents a share, versus 37 cents a year ago.
Southwest Air, Thursday a.m.
The nation's No. 6 airline in terms of passenger traffic is No. 1 in terms of things that matter to investors - earnings and stock performance.
The grandfather of the discount airline sector has managed to stay profitable through the industry downturn that has spurred billions in losses for the other major carriers. The second quarter, when jet fuel prices soared, produced even more red ink. But Southwest was helped by long-term fuel purchase contracts that kept its fuel costs under control.
Still, there are a few clouds in the otherwise blue skies for Southwest. It faces growing competition from other discount airlines, such as Independence Air, which started flying last month at Dulles International Airport, the same general market served by Southwest's Baltimore-Washington International Airport hub.
Why it matters: Southwest will be the first major airline to report results. If earnings fall short of expectations, it could suggest even bigger losses at more troubled carriers.
First Call forecast: Earnings of 16 cents a share, up from 13 cents a year earlier.
IBM, Thursday p.m.
Tech investors are feeling a bit blue lately. But Big Blue can help turn that around if it indicates it's seeing healthy demand for software, hardware and computer services.
IBM is arguably the most important tech bellwether. Sure, its go-go growth days are over: analysts are predicting just 8 percent sales growth from a year ago in the second quarter. But IBM, so diversified, should be able to provide Wall Street with the most accurate snapshot of corporate tech spending patterns.
In addition, investors will watch how the strengthening dollar affects IBM. The company, which generated 60 percent of its sales from outside the U.S. in the first quarter, has seen a large sales boost from favorable exchange rates during the past year. Going forward, currency will have less of a positive effect.
Why it matters: As goes IBM, so go HP, Dell, Sun, EMC, Microsoft, Oracle, SAP and so on. IBM competes with them all, and smaller techs as well.
If IBM gives an upbeat outlook, that could mean fears about a slowdown in corporate tech spending were overblown. But if Big Blue is cautious, that's a cause for concern.
First Call forecast: $1.12 a share, versus 97 cents a share a year ago.
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