Q1 Earnings Outlook Looks Dubious

by Beth Gaston Moon | April 6, 2012 11:46 am

[1]First-quarter earnings season is upon us, folks, and the results might not be pretty.

In fact, analysts predict that the most recently completed quarter was the slowest rate of earnings growth[2] since the third quarter of 2009. Standard & Poor’s is forecasting an anemic 0.93% growth rate in the first quarter on a year-over-year basis. In last year’s first quarter, earnings grew 19.7% from the same period in 2010. Thomson Reuters and FactSet data are predicting a similarly dramatic slowdown.

Not only is this expected earnings growth considerably lower than last year, it is well below estimates from earlier this year. At the start of the quarter, analysts were expecting a growth rate[3] closer to 4.5%.

Reasons for the drop in earnings growth include (not surprisingly) the debt crisis in Europe and rising commodity prices. Also, many companies have now exhausted their resources for cost cutting. After the market bottom in 2008, companies began trimming expenses and reducing their work forces. At this point, companies are operating more efficiently and there isn’t much more fat to trim. The proof of this will be in the (little-improved) earnings.

Current estimates point to three bright spots (relatively speaking): The industrial, technology and consumer staples sectors are expected to show earnings growth for the first quarter. Energy earnings are expected to be virtually unchanged, and the remaining six S&P sectors are likely to see earnings losses, especially in materials and telecommunications names.

There is a silver lining to these dour expectations, of course — the bar is set pretty darn low. The slightest upside surprises could spark buying demand. Call it a case of “sell the rumor, buy the news.” The caveat, of course, is if companies add insult to their already injurious first-quarter results by guiding lower for the second quarter or the full year.

Earnings season always unofficially begins with Alcoa’s (NYSE:AA[4]) quarterly report, which is set for Tuesday after the close. The aluminum company is expected to report a loss of 4 cents per share (according to Briefing.com), down from a year-ago profit of 28 cents.

Other big names slated for next week include Progressive (NYSE:PGR[5]) Wednesday morning and Google (NASDAQ:GOOG[6]) Thursday afternoon. The insurer is expected to report per-share results of 39 cents, down from 55 cents last year, while the king of search is projected to have earned $9.61 during the quarter, up from $8.08 in the year-ago period.

Friday allows a peek into the health of the financial sector, as both JPMorgan Chase (NYSE:JPM[7]) and Wells Fargo (NYSE:WFC[8]) report before the open. It’s expected to be a mixed bag; the consensus earnings estimate for JPM is $1.16 per share (down from $1.28 last year) while Wells is expected to book per-share earnings of 73 cents, up from 67 cents the previous year.

As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/04/q1-earnings-outlook-looks-dubious/

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