Tuesday, January 15, 2013

This Week's Key Earnings

Earnings season gets in full swing this week and the theme of the week is mainly financials with a couple of other huge bellwethers giving results towards the end of the week. The key economic takeaway from the banking sector's results will be to see whether they are feeling sufficiently confident in the recovery to start lending again. If they are then we can expect a boost to consumer spending as the year goes on.


It is an unusually busy Monday with high dividend utility play Consolidated Edison giving results. It has been one of the weaker performers in the high yield space over the last year or so. Will that change this year? Trucking around bulk commodities isn’t a great business right now so investors shouldn’t expect too much from Heartland Express. Changing track, the semiconductor sector had a tough 2012 with demand not working out as strong as expected at the start of the year, but Linear Technology Corp was one of the few success stories.

Morgan Stanley starts the banking theme for the week but I think the most interesting results on Monday will come from PPG Industries (NYSE: PPG). The market has been in love with the stock over the last year along with companies like Sherwin-Williams. With the latter, it is largely due to renewed confidence in the housing market, but PPG is much more exposed to the industrial and transportation coatings markets. Its automotive and aerospace markets have served it well last year and, with Alcoa talking about another good year for those industries, PPG should be on the right track.


Commerce Bancshares keeps up the financials theme on Tuesday.


This day sees the start of two huge days for banking with JP Morgan Chase (NYSE: JPM), Comerica, U.S. Bancorp and Goldman Sachs (NYSE: GS) all giving numbers. As ever, investors will be looking out for what these banks are saying about the economy. With regard to the banks the traditional way to evaluate a bank was on a price/book value basis. I’ve selected some banks for reference here. In general, I have a positive view on the outlook for US financials but the metrics suggest the market doesn’t share it.

GS Price / Book Value data by YCharts

It’s not hard to see how low rated JPMorgan and Goldman Sachs are. There is a reason for this. The market appears to have had enough of hearing about Fabrice Tourre, Jerome Kerviel, Kewku Adoboli and surprise $2 billion losses at JPMorgan. The banks with substantive trading interests are not being rewarded with flying stock prices, and with dividend payments being restricted investors are entitled to ask: What’s in it for us? No matter, the gambling goes on.

My take is that the sector does look cheap, but it might be better to buy a banking ETF in order to diversify away the individual stock risk of the next little mishap that one of their ‘traders’ is motivated to achieve.


Banking continues to hog the headlines with American Express, Bank of America, and Citigroup all giving numbers today. Fastenal is an interesting industrial and construction supply company with some very strong growth drivers but I can’t get my head around the evaluation.  Intel really is the bellwether stock in semiconductors and consumer electronics, and the key things to look out for here are its forecasts for gross margins and its inventory positions. If they are not headed in the right direction then history suggests the stock will not do well. Whatever Intel says will set the tone for technology so listen carefully.

Health care planner United Health also gives results as does industrial company Amphenol.


The theme of Friday is industrials. I must confess I’m not the biggest fan of General Electric (NYSE: GE). My reasoning is that in the industry segments where it should be doing well (healthcare, aviation) it appears to be underperforming. Furthermore, its largest profit center is GE Capital (just when you thought the financial story was over for the week), which has heavy exposure to Europe, and it is scaling back operations in GE Capital anyway. Energy infrastructure should be doing fine, but investors need to see GE getting back to firing on all cylinders. Parker-Hannifin and Rockwell Collins are also giving results Friday.

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