This Week's 2Q Earnings Reports: An Economic Snapshot

It may be the height of optimism, most project overall earnings growth for the S&P 500 Index stocks to be down by nearly 30% from the second quarter of 2008.

Stocks punched higher in March when a handful of companies said profits for the first three months of the year wouldn't be as dismal as feared. But many businesses achieved better-than-expected results by slashing costs, including payrolls.

Now Wall Street wants to see signs that companies are selling more goods and services -- for the health of the corporations themselves and for the overall economy.

But investors are already on the pessimistic side about earnings, and that has already pulled the Standard & Poor's 500 index down 7 percent from its peak in mid-June.

Analysts polled by Thomson Financial expect earnings for the S&P 500 companies fell an average 35.5% in the April-June from a year earlier after falling the same amount in the first quarter.

Here are five companies that will report earnings this week. Each provides a snapshot of the economy.

Yum Brands Inc. (YUM)

Why it's important: With chains including KFC, Pizza Hut, Taco Bell, Long John Silver's and A&W All-American Food, Yum's 36,000 restaurants span 110 countries and territories. Fast-food chains tend to weather economic downturns better than sit-down restaurants because their food is cheaper.

When it will report: Tuesday, July 14.

What the experts say: On average, analysts polled by Thomson Reuters expect Yum to post a profit of 43 cents per share on revenue of $2.5 billion. In the same quarter of last year, the company reported a profit of 45 cents per share on revenue of nearly $2.7 billion.

You'll know the economy is improving if: Yum's performance improves in its sluggish U.S. operations, especially at brands such as Pizza Hut that generally have higher customer checks. Better results at Pizza Hut and KFC -- which has a sizable sit-down business -- would signal that more people are opting to eat out rather than cook at home.

You'll know the economy is not improving if: Yum's U.S. operations falter, especially at its higher-priced chains. Weak sales in Yum's important China operations would be a sign of sluggishness in the global economy.

The quote: "I'm expecting a pretty high-quality quarter. Things are going OK in the U.S., and I think things are going a little bit better than planned in China," said Larry Miller, restaurant analyst with RBC Capital Markets.

IBM Corp. (IBM)

Why it's important: As one of the world's largest corporate technology suppliers, IBM's results say a lot about how much businesses are willing to spend on everything from computer servers to software and consulting services.

But it can be tricky to read those results for clues about the broader economy. For one thing, IBM right now is booking revenue on contracts that may have been signed months or even years ago. Second, in a down economy, companies often turn to IBM's outsourcing services as a way to save money, so IBM's sales can go up even while everything else is going down.

The best way to interpret IBM's results for signs of the health of the overall economy is in the company's overall forecast.

When it will report: Thursday, July 16.

What the experts say: On average, analysts polled by Thomson Reuters expect IBM to earn $2.02 per share on $23.58 billion in revenue. In the same quarter of last year, the company reported a profit of $1.98 per share on revenue of $26.8 billion.

You'll know the economy is improving if: IBM's sales show some improvement that can't be attributed mainly to weakness in the dollar. Another encouraging sign would be if the company raises its already-bullish forecast for $9.20 per share in profit in 2009.

You'll know the economy is not improving if: IBM backs off the forecast at all.

The quote: Brian Marshall, an analyst with Broadpoint.AmTech, wrote in a research note Thursday that IBM's management has "navigated the turbulent "economic currents" over the past decade with fine stewardship," but cautioned there might be little room left for IBM to keep wringing out increases in its profit margin.

Marriott International Inc. (MAR)

Why it's important: Marriott operates more than 3,200 lodging properties worldwide, and the company's performance offers insight on travel trends and consumer spending. Demand for its hotel rooms and timeshare resorts has been weak, and investors are curious about whether business picked up with the approach of summer.

When it will report: Thursday, July 16.

What the experts say: On average, analysts polled by Thomson Reuters expect Marriott to post a profit of 22 cents per share on revenue of $2.54 billion. In the same quarter of last year, the company recorded a higher profit of 51 cents per share on revenue of $3.19 billion.

You'll know the economy is improving if: Declines in hotel demand start to stabilize. If travelers are booking hotel rooms, it could mean consumer spending is increasing, despite continued layoffs nationwide.

You'll know the economy is not improving if: Revenue per available room sinks during the quarter. Known in the industry as revpar, revenue per available room is considered a key gauge of a hotel operator's performance. Last quarter, revpar for Marriott's comparable company-operated properties dropped 19.6 percent.

The quote: "In North America, you will see stabilization for room demand. Leisure travelers are still going on vacations but they're not going as far or not as long a period of time," said Mark Basham, a hotel and restaurant analyst with S&P Equity Research. In 2008, the company recorded 61 percent of revenue in North America.

Harley-Davidson Inc. (HOG)

Why it's important: Harley-Davidson is the top retailer of heavyweight motorcycles and its sales are closely tied to consumer confidence. A new hog, as they are called by fiercely loyal owners, is the consummate discretionary purchase and can run $20,000 or more.

When it will report: Thursday, July 16.

What the experts say: On average, analysts surveyed by Thomson Reuters expect Harley to report a profit of 25 cents per share on revenue of $1.18 billion. In the same quarter last year, the company posted a profit of 76 cents per share on revenue of $1.4 billion.

You'll know the economy is improving if: Operations at Harley-Davidson Financial Services stabilize. The company's financing arm has been posting steep declines in operating income due to the lockup in the securitization market, which it has long relied on for funding. If that market shows signs of life, it means the lending market is easing.

You'll know the economy is not improving if: Harley cuts motorcycle shipments. Motorcycles are a big-ticket purchase and consumers buy them when they have money to burn. Last quarter, the company stood by its shipment guidance of 264,000 to 273,000 bikes.

The quote: "It is our expectation that the general economy and deteriorating employment numbers could hinder significant increases in motorcycle purchases," KeyBanc analyst Scott Hamann wrote to investors on Tuesday.

Bank of America Corp. (BAC)

Why it's important: Bank of America may help investors determine where the economy is headed since so much of its business depends on consumers and housing. The bank has about 55 million consumer and small business customers, making it vulnerable to delinquencies and defaults, yet also ready to thrive when the economy recovers. But the bank has internal issues, especially since CEO Ken Lewis' management ability has been questioned following BofA's acquisition of Merrill Lynch & Co. The bank has received $45 billion in bailout funds, but it's not known when it will repay the government.

When it will report: Friday, July 17

What the experts say: On average, analysts polled by Thomson Reuters expect Bank of America to post a profit of 24 cents per share on revenue of $32.35 billion. In the same quarter of last year, the company recorded a profit of 72 cents per share on revenue of $20.32 billion, before the Merrill acquisition.

You'll know the economy is improving if: There's any sign of improvement in credit. It's a given Bank of America will see more debtors fail to make payments. The question is whether the rise in defaulting loans is starting to moderate, especially among credit cards and mortgages.

You'll know the economy is not improving if: Loan defaults accelerate at a much faster pace than expected.

The quote: "This is a crucial period for Ken," said Gary Townsend, president and chief executive of private investment group Hill-Townsend Capital Inc. "He must show his board members and shareholders that his stewardship through the financial crisis and then into the future is something that has been appropriate, adequate and satisfactory."

General Electric Co. (GE)

Why it's important: GE is one of the world's biggest companies. It has 4 million shareholders. Millions of people have GE microwaves in their kitchens. If you flew on a plane recently, chances are good the engines were made by GE. Your favorite NBC television show comes to you courtesy of GE, which owns the network. Your doctor may use GE software to store your medical records. Some of the electricity for your home may come from churning GE windmills. And that light bulb in your bedroom lamp may very well be a GE bulb.

When it will report: Friday, July 17.

What experts say: On average, analysts polled by Thomson Reuters expect GE to post a profit of 23 cents per share on revenue of $42.3 billion. In the same quarter of last year, the company recorded a profit of 54 cents per share on revenue of $45.31 billion.

You'll know the economy is improving if: GE's aircraft engine sales hold up. Big plane makers like Boeing are seeing orders slump, but GE is still doing a brisk business fixing engines that it already sold. If new engine sales are steady, that could show the downturn in global aviation might not be as bad as feared.

You'll know the economy is not improving if: GE's commercial real estate business keeps tanking. GE owns a lot of shopping centers, manufacturing plants and office buildings through its GE Capital finance division. Many of those are empty as companies and retailers cut back due to the recession.

If we don't get some huge surprise on the revenue side, that is probably a good confirmation that the worst is over and a slow recovery is underway.

This past week was the official beginning of the earnings-reporting season. Because earning results are so important this quarter, of the 500 companies in the S&P Index, four front runners made their reports this week. Granted this is a very small sample, but the results may be encouraging. Three of the four early-reporters beat estimates by wide margins. Although Alcoa (AA) reported lower earnings, they beat Wall Street's estimates handily. Of particular good news, Family Dollar Stores (FDO), the deep-discount chain, reported earnings 36% higher than a year ago and 5% better than Wall Street estimates.

Keep An Eye on Oil & Natural Gas

Last month, I published indications that oil supply shortness and aging wells will become a factor within the next five years and possibly as soon as three years from now, due mostly to high and increasing rates of depletion. So at some time between 2012 and 2014 I expect to see record breaking oil prices.

Will much higher oil prices bring down the OECD economies and thus cut oil consumption rapidly as has happened after the 2007 - 2008 rise from $50 to $147? It could be that OECD oil consumption will not have increased so much over the next 2 - 4 years that another economic downturn would be able to reduce it as dramatically. Also, a countervailing force will be the huge budget surpluses that higher oil prices will provide the exporting countries, which now account for 40% of global oil use. These countries have rapidly growing populations, rapidly growing needs for new infrastructure and industrial investments and with their greater wealth they will rapidly expand their internal use of oil, thus offsetting much if not all reduction in OECD oil demand from an echo recession.

The above projection, if accurate, suggests that if oil goes to $250 some time in the 2012 - 2014 time frame, the pullback will be limited to, say, $150, not to the $40 level reached recently. The next wave after that one would take it to, say, $400 with a pullback to $250 - perhaps in the 2014 - 2018 time frame. Either way prepare for a rough ride ahead by focusing on niche sector investments within a diversified global portfolio.

Disclosure: The author holds diverse interests in several markets.

Comments

[Tom Colangelo:]

The market will continue to move sideways based on the numbers and guidance given this week BECAUSE:

1) FIRMS will say nothing or say that the outlook looks better than the recent past. It would be a SELF-FULFILLING PROPHESY if companies with weak Q2 results give negative guidance for Q3. A literal death wish for any firm saying that they won’t improve their numbers even though the economy is beginning to level out and the stimulus is still gaining momentum.

2) The banks will report good numbers because they talk to Geithner EVERY DAY about how they are doing. He is protecting the $1 trillion we have given to banks and financial institutions and for his own sake, must know how the banks are faring. If they were in trouble, we would know about it already because nobody likes surprises.


3) Q2 earnings will be presented as improving month-to-month versus the less favorable Y-O-Y. You will be sold on how things are improving and to forget about t he Y-O-Y because it is not valid in this recession.


The market will meander until Q3 reports. In the mean time, get dividends while you wait for the market to move. Take advantage of this by getting into a strong position in some of the things that we CANNOT DO WITHOUT like:

OIL – BP (Yield = 7.43%), RDSB (Yield = 7.11%), etc.

UTILITIES - ATT (Yield = 7 %), VZ (Yield = 6.4%), VOD (Yield = 6.2%), NGG (Yield = 5.9%), CHL, etc.

FOOD - ADM (Yield = 2.1%), MOO (Total Return = 23.7%)

BANKS - NYB (Yield = 9.3%)

I hold positions in all of the mentioned stocks.

Good Luck.

Jul 13 06:31 AM

[Market Crank:]

Not being rude, but doesn't mean you can afford to eat KFC,every1 else can.The results are going to be more obvious by end of the 3rd quarter.Unfortunately they won't be good.

Jul 13 09:09 AM

[TradingHelp...:]

Good pick of stocks. GE, BAC, and IBM are very key. Upbeat reports from those and other mega-caps will help stop the S&P decline from May's highs.

Bad reports and the S&P will break clean below its 200-day moving average aand we could see more downward pressure.

Jul 13 09:15 AM

[Mark Bern:]

Again, good choice of stocks to provide a good view into the condition and possible direction of the economy. But, even if these companies beat expectations or miss badly, next week or the week after could change investor psychology once again. This market is very fickle. It's a "what have you done for me lately" sort of short-sighted, reactionary market.

My advise: Go out and buy some Tums, and when the turmoil starts to get to you, try a round of golf (unless that makes you frustrated, too) or read a good book. Check in occassionally. Don't go all in during all this market churn. Wait for an entry point that you can live with over your planned investing horizon and use stops to keep you from letting minor mistakes become huge.

The next few weeks should be interesting. Good Luck!

Jul 13 11:14 AM