Q1 Earnings: Potential Winners and Losers

by Charles Rotblut

First-quarter profits are going to stink. The consensus projections call for S&P 500 profits of $16.33, which equates to a decrease of approximately 14% from a year prior.

On a company-specific basis, the numbers could be worse. Median earnings are likely to decline 19.3%. More than 10% of S&P 500 members are expected to report triple-digit drops in profits (57 companies with declines of 100% or more). Conversely, just 8 companies will please shareholders with increases of 100% or more.

Overall, 364 companies are forecast to report a year-over-year decrease in earnings. The actual number will be somewhat less given the probability of positive surprises, but first-quarter profits will clearly reflect the ongoing recession.

Behind the headline numbers will be a mixed bag of reports, with some winners and some losers.

Potential Winners

The biggest winners could be oil refiners Sunoco, Inc. (SUN), Tesoro Corporation (TSO) and Valero Energy Corporation (VLO). SUN and TSO could see profit gains of 219% and 160%, respectively, while VLO could report a 41% increase in earnings.

The drop in oil prices and improvement in margins are helping these companies. Refiners are dependant on the crack spread (the difference between what they pay for oil and how much they sell gasoline and heating oil). An upward, albeit volatile, improvement in the crack spread - combined with cost-cutting measures - has helped profits and offset the impact of lower demand.

Medical Profits Growing, As Expected

Investors preferring a group not dependent on commodity prices may want to look at medical care companies. Several of these companies should report double-digit growth, including Stericycle Inc. (SRCL) and Medco Health Solutions Inc. (MHS).

The advantage of medical companies is that they are less economically sensitive. Therefore, while their rate of growth won't wow anybody, these companies are capable of delivering good numbers even in the midst of a recession.

Stericycle handles medical waste. The company gave a bullish outlook for 2009 last month and the consensus earnings estimate has been rising. Though SRCL has a pricey valuation, it also has a history of topping estimates. The consensus estimate calls for the company to earn 47 cents this quarter, an increase of about 20% from last year.

MHS reaffirmed its full-year 2009 guidance last month. The pharmacy benefits manager is seeing strength in its specialty pharmacy business as well as its mail-order prescription business.

Though first-quarter estimates have been trimmed over the past 30 days, down 2 cents, brokerage analysts are still calling for growth. The consensus earnings estimate of 62 cents represents growth of 13%. Medco has topped expectations for 11 consecutive quarters.

Homebuilders Should Report Smaller Losses

Several homebuilders will face easier comps, resulting in impressive year-over-year gains. For example, D.R. Horton, Inc. (DHI), Centex Corporation (CTX) and KB Home (KBH) are all projected to report losses that are at least 75% smaller.

The housing slump is not over, however, especially given that unemployment continues to rise and credit remains tight. Furthermore, homebuilder profit forecasts for fiscal 2010 are also falling. Therefore, while the year-over-year comps might look good, business conditions will remain tough.

(Fiscal 2009 forecasts for DHI have improved over the past 60 days, though are down over the last 30 days.)

Potential Losers

It is going to be another difficult quarter for the semiconductor industry. The worldwide economic contraction has hurt demand at a time when the industry was already dealing with downward pricing pressures and excessive inventory.

Not a single chip company within the S&P 500 is forecast to experience growth in the first quarter.

National Semiconductor Corporation (NSM) provided a good example of the industry's woes when it reported last week. Adjusted earnings totaled 4 cents per share, a decrease of 86% from a year prior. Sales fell 36% and gross margins worsened. Furthermore, NSM anticipates a sequential drop of 5% to 10% in sales this quarter.

LSI Corporation (LSI), Broadcom Corporation (BRCM), SanDisk Corporation (SNDK) and Texas Instruments Inc. (TXN) could all report triple-digit declines in profits. Even Intel Corporation (INTC) is expected to suffer with profits falling to just 3 cents per share, from 29 cents a year prior.

Steel Producers Are Melting

The bursting of the commodity bubble will have a dramatic effect on the numbers reported by steel companies. For example, U.S. Steel Corporation (X) is projected to report a loss of $1.39 per share, versus a profit of $2.36. AK Steel Holding Corporation (AKS) should lose 44 cents after earning 90 cents a year prior.

These companies fared well when commodity prices were soaring. Strong demand and speculative trading allowed steel producers to enjoy pricing power. Now, the worldwide economic slump has hurt demand. Though the stimulus package could eventually revive demand, it has yet to have any effect.

Bank Earnings

I'll finish with a quick note about banks. The numbers will be horrible. Although several firms recently made comments about being profitable in the first-quarter, few details were given and the assessments likely did not reflect the large write downs that are still being taken.

As I said last week, you should be aware that financial stocks are trading mostly on sentiment and news flow, not actual fundamental data or technical analysis.

Comments

[repossessio...:]

Hey - I couldnt agree more - we create our own news based on what we want to see and hear. Our reticular activating system will pick up on that which we are concentrating upon. Facts and figures do not really figure very highly. Selling realities is just a transference of wmotion after all. The emperors new clothes indeed...................

Mar 18 06:31 PM

[Smart1:]

I think the Intel 3 cent estimate is very conservative. Their Q4 2008 number was low because of a write down of almost $1B. Without that, I think they would have been over 20 cents. I understand that Q1 revenues will be lower but, assuming there is not another big write down, I don't see the earnings falling that much. I kind of roughed in the numbers and came up with 12 to 15 cents. Granted there are several high impact variables but I tried to take a conservative position on most of them and still came up with 12 to 15 cents.

Mar 18 11:00 PM

[Karen Mulvany:]

For Intel, I think the real question is the guidance as opposed to the Q1 actuals -- whether management will guide for sequentially up Q2 revenues or down. Semis have been outperforming because the street is assuming the worst of the inventory contraction is going to occur in Q1 and that Q2 will deliver higher revenues. But if management punts on guidance, then investors will likely flee.

Given where we are in the cylce, the sequential comparisons will be of more interest than the year over year ones for the remainder of this year. It's sequential comparisons, ex seasonal factors, that will call the bottom.

Mar 19 12:43 PM