Weekly Preview: Earnings Upside Continues

The weak dollar trade is back on today, as the USD is down against most major currencies. This has pushed gold, copper, and other hard commodities up to or near their highest levels of the month. Days like this are generally good for the Secular Trends Portfolio, and in early morning trade the model has picked up a quick 2 percentage points on the strength of Las Vegas Sands ((LVS) - up 12%), Petrobras ((PBR) - up 4%), Alcoa ((AA) - up 3.5%), and Peabody ((BTU) - up 4%).

Caterpillar a Key Earnings Report Tomorrow

Caterpillar (CAT) is seeing strong early buying today ahead of Tuesday’s earnings report. CAT shares are up 6% this morning in advance of what is - for these eyes - the most anticipated earnings call of the season. The folks at the local “home office” paper in Peoria, IL did a nice preview piece Sunday that talks about the difficulties in estimating what kind of numbers Caterpillar will report. Sales are sure to remain down year-over-year in a big way (35-40%), but the recent weakness of the dollar is a strength to this company that does more than half its business overseas. And after taking big charges in the first quarter to curtail production and lay off workers, how much more was needed in Q2?

And let’s not forget the kind of unique viewpoint CEO Jim Owens & company have on the global industrial landscape. They have footprints in many businesses on the leading edge of the business cycle, so their comments Tuesday will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.

IBM Hat Tip

I have to take a minute to tip my hat to IBM (IBM) for putting up a monster quarterly report last week. Pre-tax margins were up over 400 basis points (wow), while diluted EPS was up 18%. Gross margins have now risen for 19 of the past 20 quarters, while the company is on track to pump out nearly $13 billion in free cash flow this year. Oh, and all this on a 13% drop in revenues. So a full tip of the hat to Big Blue, and a hat nod to me for going against the call of Goldman to avoid IBM and stick with Dell (DELL) going into earnings. Per my post from 10 days ago:

Goldman downgraded IBM this morning while upgrading tech hardware as a whole. Strange.

While I’m not out to do so, I seem to have a habit of zigging when they say to zag (see my earlier commentary on commodities, and on Caterpillar…I guess that makes me 1 for 2 so far, if we’re keeping score)

IBM reports earnings on July 16th, and the company has already reiterated its earnings guidance for longer than any company I follow, as they expect to earn “at least” $9.20 in Fiscal 2009 and $10 - $11 per share in Fiscal 2010.

My expectation is for the company to meet or beat on the current quarter, and in this earnings season I think that will be enough to push the stock price back into the low $110’s range.

So I guess that makes me 2/3 against Goldman, considering that IBM was up 7% on earnings day while DELL got pounded for a 10% loss. After reviewing my secular thesis I upped the IBM stake in the Secular Trends Model on July 10th. In other Goldman news, they came out today with a revised S&P 500 target for year-end of 1050, or 12% upside from here.

Non-Financials in the Spotlight

This is another jam-packed earnings week, with a key report from Texas Instruments out Monday, and media hype favorites Yahoo! and Apple tomorrow. I’m not particularly concerned about any of these three, and will be much more interested in the results Tuesday from CAT, CNH Global (CNH), Linear Technology (LLTC), Peabody Energy Corp (BTU), and Freeport-McMoRan (FCX). These are the companies that need to show - and give color to - improved outlooks and results because of their front-row seating in the economic recover theater.

The major medical device companies are also reporting this week, so I’ll be focusing in on results from Boston Scientific (BSX), Stryker (SYK), and St. Jude Medical (STJ).

Disclosure: author does not hold personal stakes in the companies mentioned. BTU, IBM, CAT are held in the Secular Trends Model Portfolio

Comments

[Ryan Barnes:]

70% of S&P 500 companies to report this season have surpassed earnings estimates, including 100% of the DJIA stocks that have reported thus far. This is what I mean by upside.

Best of luck in your investing efforts.

Jul 21 10:24 AM