Thursday Earnings Preview: Heavyweights in Several Sectors

Thursday delivers another installment in the 3Q earning season saga. This episode will showcase earnings from many market heavyweights, such as AT&T (T), Phillip Morris (PM), Merck (MRK), Occidental Petroleum (OXY), McDonald's (MCD), American Express (AXP), Amazon (AMZN), and United Parcel Services (UPS). This small group will command the attention of the entire street, since they are some of the most heavily traded stock in the world.

The street is looking at top line growth and bottom line increases through cost cutting measures.

Thursday’s market performance will have two contributing factors: Earnings and Economic data. From an earnings stand point most of the focus will be concentrated on these three bellwether companies: AT&T, McDonald's and UPS. From an economic data point of view, the spotlight will be on Initial Jobless Claims and Continuous Claims. If earnings and economic data are able to provide better than expected results, you will probably see stock indices push through higher levels. Any other scenario will be a catalyst for stock to test lower levels.

The major sectors impacting Thursday's market performance are industrials, consumer discretionary and telecommunications.

Industrial Impact: UPS

UPS reports at 7:45am on Thursday. The street is looking for the $.517 earnings per share (EPS), but UPS has already given guidance of $.50. So the prospect of UPS exceeding the estimates are slim to none. Unfortunately, UPS has been saddled with various issues that are counterproductive to increased earnings, such as decreasing shipping volume due to the economic slow down, union problems and overcapacity. If UPS beats its earnings estimates it will be a result of aggressive cost cutting and not top line growth.

Consumer Discretionary Impact: Amazon, McDonald's

Amazon is also reporting Thursday, in the afternoon. Recently, Amazon has been benefiting from increased video game sales and more increased marketing and media buzz surrounding the price reduction of its popular Kindle digital book viewer. U.S. consumers are looking to save more aggressively and Amazon’s lower price points have it properly positioned to take advantage of this during this economic downturn. Earnings estimates for Amazon are $.331, but many analysts believe Amazon will surpass this figure due to stronger revenues.

McDonald's, king of the hamburger, is set to release its earning before the bell rings for trading on Thursday. Earnings estimates are set at $1.108 EPS. Many analysts have a buy rating on this stock, despite increased competition from the likes of Burger King with the introduction of its $1 double cheeseburger. Much of this optimism is due to store locations. There are now more Golden Arches in Europe (2,014) than there are in the United States (1,697). In addition to the greater European presence, McDonald's also charges higher franchise fees in Europe -- 17.4% vs. 13.6% in the US. Foreign Exchange rates are in McDonald's favor since the U.S. dollar has been in a downward spiral vs. Britain’s Pound Sterling and the Euro Zone’s Euro.

Telecommunications/Consumer Discretionary: AT&T

Due out at 8am, AT&T is expected to blow away its earnings expectations of $.501. The market is overjoyed about the reduced price of the 3G iPhone, which is the offspring of a union between AT&T and Apple (AAPL). The iPhone is so successful it has exceeded AT&T's network infrastructure capacity in certain areas of the U.S., causing poor service for many subscribers. This product will be the driving force in the AT&T earnings story, especially since the wire line division has been continuously dwindling away as the entire globe goes mobile. In this scenario a good showing will prove that the consumer is still willing to purchase discretionary items, as long as they are priced sensibly.

The Bottom Line

Economic numbers have the potential to overshadow the greatest of earnings estimates, as witnessed on Tuesday October 20th with the poor Housing Starts and Building Permit figures that bested Caterpillar’s (CAT) surprise earning in excess of 856.5%, ending the day with the Dow Jones Industrial Average tumbling by 100 points. Ultimately, earnings results and economic indicators need to produce positive results in order to sustain an ongoing market recovery. Without positive results you will definitely see a market correction in the very near future.