The Week Ahead: Earnings onslaught begins
Posted
Jul 04 2008, 08:00 PM
by
Andrew Horowitz
Rating:
This week begins the unofficial start of earnings season and it is sure to be a busy one. Alcoa's quarterly report unofficially signals the beginning of the onslaught of news related to earnings for publicly traded companies within the U.S. markets.
So far this year, companies have adjusted their earnings significantly lower and analyst estimates have followed along like penguins. Depending on how you look at it, the S&P 500 could still be overvalued. Even with a precipitous drop we’ve recently seen, the 12-month trailing P/E ratio is now close to 22.50. Look how it compares with recent years:
2004 – 20.70 2005 – 17.85 2006 – 17.40 2007 – 22.19
What may move the markets this week?
Tuesday, July 8
Costs are a major factor for many companies as the price of almost all of the components for the manufacturing process have increased dramatically. This is certainly true for Pepsi Bottling. Earnings growth has been nonexistent and investors have been unloading shares at a rapid pace as the mindset of many individuals are focused squarely on cost-cutting, it will be interesting to see if there will be a shift from bottled beverages to plain-old tap water. First Call is showing average estimates of $.75 per share for the quarter on $3.5 billion of revenue. Listen fort for questions during the upcoming conference call about the high level of debt and the effect the weak dollar will have on this company’s bottom line. It will be interesting to hear what management has to say.
And they’re off! After the close, Alcoa will look to beat estimates of $.69 per share on a healthy $7.3 billion of revenue. Growth of earnings has recently made a noticeable downward turn and even though the current price-to-earnings ratio for this company is right in the middle of its long-term average, investors have had a difficult time getting excited about this name into a sagging market. Fundamentally the company looks solid enough with no items that stand out, yet institutional ownership is a minor components and the fact that shares recently broke through its longer and shorter term moving averages has to be a concern. Long-term support is currently at $26.50 per share.
Wednesday, July 9
Anything related to the oil and gas industry has been on a relative upward trend for some time. Acergy, builds designs, installs as services offshore surface and subsurface infrastructures for the oil and gas industry. Shares have recently demonstrated an inverse head and shoulder pattern during January 2007 to March 2008. This is generally considered a bullish signal and shares ratchet up 75% from the turning point off of the right shoulder in March. Analysts are estimating a $.37 per share gain for the quarter on $735 million of revenue. Recently, shares have battled resistance and quickly snapped through their moving averages, testing support of $22. Be careful here as a miss could pull this stock one down hard. If you are a shareholder, ready your protective-stops. Now is the time to stick tight to your risk management disciplines.
Shaw Group provides engineering, technology, construction, fabrication, environmental and industrial services. While that is a mouthful, that same mouth is surely smiling if you own these shares. Earnings growth is progressing nicely even though the P/E ratio of 77 appears to be off the charts. But the technicals on the stock look excellent. Recently, shares have attempted to test their year 2000 high and are now consolidating along that same resistance point. This chart is setting up for a blast off if they meet or beat estimates of $.63 per share. If you’re considering entering a position, look to dollar cost average before and after earnings. Realize that earnings announcements provide extraordinary volatility for many stocks and this one shouldn’t be much different. Even so, both fundamentally and technically this may be worth considering.
Thursday, July 10
Sometimes, no matter how well you do as a company, the markets will have their way with you. It is said that a great stock in a bad market is still a bad stock. At the same time, a bad stock in a good market is still a bad stock. Fastenal may just be the former of those sayings. The company's historic earnings growth has been outstanding and stable. Debt is nonexistent and shares have been on an long-term upward trajectory. Perhaps the very recent downturn can be blamed more on market conditions over issues specific to the company. Analysts are expecting $.50 per share for the period on $602 million of revenue. If is true that the general dip is related to the markets then shares could quickly appreciate back to recent levels over $50.
Chattem, is a manufacturer of pain relievers, shampoos, sunscreens and various consumer products… stop right there! Consumer products? Lately, there has been an interesting break within the consumer sector as major consolidators and retailers that have a dedicated "low cost” policy (such as Wal-Mart) have been doing relatively well. Since 2006, shares of this company have been progressing higher until the marke correctiont of 2008 took some wind out of Chattem's “sales.” The one negative item that jumps out when scanning the balance sheet ratios is the 250% debt to equity ratio. Analysts are looking for $1.03 per share on $117 million of revenue. Interesting...
Friday, July 11
The beloved blue chip of many a portfolio, General Electric is set to set the record today and hopefully figure out if they actually know what is happening within their financial unit. Recently there have been discussions and reposts stating that there is little interest by companies to aquire the ailing unit aas GE’s management was considering putting it up for sale. Add the fact that Vanity Fair has recently pointed a finger at CNBC as a significant cause of the Bear Stearns collapse and the once admired company is starting to take on a whole new look. Analysts are still predicting earnings of $.54 per share on $45 billion of revenue. The bottom line is that unless management can get a handle on the losses from their financial unit, General Electric shares will continue to suffer. (Read more about the unbelieveable Vanity Fair accusations)
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
Disclosure: Horowitz & Company clients may hold LONG position of securities mentioned as of the publish date.
