MADLEN READ
NEW YORK — It's the earnings, stupid.
Optimism that the fortunes of financial companies like Citigroup were improving sparked a four-week rally beginning March 10 that drove the Standard & Poor's 500 index up 25 per cent. But now investors will find out exactly how companies across all industries performed during the first three months of the year. Those quarterly results will determine whether the surge was the beginning of a bull market, or just a blip.
After all, the market's last promising rally was derailed not by jobs data or an emergency federal bailout but by forecasts from companies that make everything from computer chips to tin cans to movies.
The S&P 500 jumped 182 points, or 24 per cent, to 934 between Nov. 20 and Jan. 6. The next day, technology bellwether Intel Corp., aluminum producer Alcoa Inc. and media giant Time Warner Inc. all issued grim earnings guidance. The S&P dropped 28 points, or 3 per cent, that day and hasn't returned to its early January levels since.
The current rally also began with a company announcement. This time, beleaguered and bailed out Citigroup Inc. said March 10 it was profitable for the first two months of the year. The S&P 500 gained 43 points, or 6 per cent, that day to 719. The index closed Thursday at 857, and markets were closed on Good Friday.
The S&P could rise more, and even turn positive for 2009, if earnings reports for the first quarter show a strengthening economy. Alcoa, the first big company to report their results each quarter, announced a loss of $497-million (U.S.) on Tuesday evening. But investors were pleased about the aluminum company's efforts to cut expenses by $2-billion a year, and the shares are up 14 per cent since.
Wells Fargo & Co., meanwhile, said Thursday it expects record first-quarter earnings of $3-billion, about 50 per cent more than the same period a year ago. The shares surged $4.72, or 32 per cent, to $19.61 that day.
“We've got this incredible possibility that the market has turned a corner — that's it's not just a bear market rally or a head-fake,” said Arthur Hogan, chief market analyst at Jefferies & Co. “Earnings are going to let us know whether the market has gotten ahead of itself, or is justified in its new valuation of stocks.”
Here are six companies that will report earnings this week. Each, in its own way, provides a snapshot of the economy.
General Electric Co.
Why it's important: GE has a stake in almost every major sector of the economy. It builds turbines for power plants and high-tech medical machines. Jetliners use GE engines. When homeowners remodel, GE's stainless steel ovens and refrigerators anchor their kitchens. And many people still screw GE light bulbs into their living room lamps. GE is also a barometer of the health of the financial world through its lending arm GE Capital.
When it will report: Friday.
What the experts say: The consensus of analysts surveyed by Thomson Reuters is that GE will earn 21 cents per share in the first quarter on sales of $39-billion. That's down from profit of 43 cents per share on revenue of $42-billion a year ago.
You'll know the economy is improving if: GE sells more of its giant energy-generating windmills. That could be a sign that the $787-billion stimulus plan passed by Congress earlier this year, which includes money for alternative energy, is starting to kick in.
You'll know the economy is not improving if: GE Capital isn't making money. Test models developed by the Federal Reserve to help financial companies gauge their health show GE Capital will at best break even this year.
The quote: “We are in a recession and, at times like these, it is difficult to predict how bad and for how long” GE's CEO Jeff Immelt said in a recent letter to shareholders.
Intel Corp.
Why it's important: Intel is a barometer of spending on personal computers and servers. When computer makers buy more of Intel's chips, it indicates they believe demand from consumers and businesses is strong. Orders have cratered in recent months. Intel's profit has plunged to its lowest levels since 2001.
When it will report: Tuesday.
What the experts say: Analysts expect net income of 2 cents per share, down from 25 cents per share a year ago. They expect sales to fall nearly 30 per cent to $6.96-billion.
You'll know the economy is improving if: They excel in areas other than the Atom, a small chip for mini-laptops called “netbooks,” smart phones and other gadgets. Atom chips are less expensive than the more powerful Intel processors found in full-size computers. Demand for the Atom has been brisk, suggesting people are buying cheaper machines than standard PCs.
You'll know the economy is not improving if: The gross profit margin falls below Intel's forecast for the low 40 per cent range. The figure measures the proportion of revenue left over after subtracting the cost of making Intel's chips and other products. Intel incurs expenses for running its factories at less than full capacity. A low number means Intel factories are even less full than expected and PC demand is humdrum.
The quote: “If anything, even though things are down, I would think they're going to be one of the positive spots in the electronics industry,” said Jim McGregor, chief technology strategist for market researcher In-Stat.
Johnson & Johnson
Why it's important: J&J is the world's most diverse health care products company, making everything from contraceptives to baby formula to advanced drugs harvested from living cells. That broad base means it captures a large slice of consumer spending. People are normally reluctant to cut back on health care spending.
When it will report: Tuesday.
What the experts say: What the experts say: Analysts expect earnings of $1.22 per share on more than $15.4-billion in revenue, down from $1.26 per share last year on sales of $16.19-billion.
You'll know the economy is improving if: Sales of both prescription drugs and consumer goods rise. People worried about losing their job and health insurance cut back on doctor visits, elective surgery and prescription medicines. Investors should consider the demand for consumer goods, not just the revenue.
You'll know the economy is not improving if: Sales of prescription drugs continue to fall. That indicates consumers are scrimping on expenses usually seen as crucial. In the fourth quarter, J&J observed consumers were becoming more frugal, and sales of items like contact lenses and diabetes test strips had fallen.
The quote: “It's probably going to be a couple more quarters before you see it in their numbers, even if the economy's already turned,” Gabelli & Co. analyst Jeff Jonas said.
Citigroup Inc.
Why it's important: The nation's largest bank is involved in everything from residential mortgages to commercial real estate to credit cards. Any recovery in Citigroup would bode well for the broader financial industry, and the market knows it: Stocks began a four-week rally after CEO Vikram Pandit said last month that January and February were profitable.
When it will report: Friday.
What the experts say: Analysts predict a sixth straight quarterly loss — this time, of 36 cents per share. In the first quarter last year, Citigroup lost $5.1-billion, or $1.02 a share.
You'll know the economy is improving if: There is any sign of improvement in credit. It's a given that Citigroup will see more debtors fail to make their payments; the question is whether the rise in defaulting loans is starting to moderate.
You'll know the economy is not improving if: Loan defaults are accelerating at a much faster pace than expected.
The quote: “Historically, losing money is a bad thing. But now, if you're losing less money, it's a good thing,” said Kris Niswander, associate director of financial institutions at SNL Financial. “We're looking for any glimmer of hope that can be found.”
Sherwin-Williams Co.
Why it's important: This paint and wall-covering company gets nearly half its sales from its remodeling and repainting business. Another 10 per cent comes from new housing and new building construction. As the economy slowed down — and housing sales and renovations with it — Sherwin's business contracted sharply.
When it will report: Thursday.
What the experts say: Analysts surveyed by Thomson Reuters expect it to earn 21 cents per share on revenue of $1.62-billion. That's below last year's 64 cents per share on revenue of $1.78-billion.
You'll know the economy is improving if: Sales of paint for new homes and remodelings rebound, even slightly. That means consumers are more willing to make discretionary purchases.
You'll know the economy is not improving if: Sales in outside the U.S., which began sinking at the end of last year, fall more than anticipated. That means the economy could be depressed for longer than expected.
Quote: “Since they're heavily tied to things like consumer spending and the repair and remodel market, they're still definitely going to be pretty pressured through 2009,” said Morningstar analyst Anthony Dayrit.
CSX Corp.
Why it's important: As a railroad company, CSX transports everything from cars and car parts to heating oil. When consumers feel pinched or homes are sitting empty, those things aren't moving.
When it reports: Tuesday, April 14
What the experts say: Analysts expect profit of 53 cents per share, excluding one-time charges. That's 34 per cent lower than the year-ago quarter.
You'll know the economy is improving if: Shipping volume picks up. Volume tends to improve before the broader economy, as manufacturing lines start moving again. The lead time can be anywhere from a few months to a year.
You'll know the economy isn't improving if: Shipments of core commodities such as lumber and automobiles, chemicals and agricultural products remain sluggish — that means demand is still frozen. The Association of American Railroads said total volume in the first week of the second quarter fell 19.1 per cent from a year earlier, comparable with previous weeks this year.
The quote: “We are model;ing for CSX's volumes to turn positive in the fourth quarter, along with the general economy,” Longbow Research analyst Lee Klaskow said.
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