CHICAGO, April 12, 2011 /PRNewswire/ -- Zacks.com
announces the list of stocks featured in the Analyst Blog. Every
day the Zacks Equity Research analysts discuss the latest news and
events impacting stocks and the financial markets. Stocks recently
featured in the blog include: Alcoa (NYSE: AA),
Google (Nasdaq: GOOG), J.P. Morgan (NYSE: JPM),
Bank of America (NYSE: BAC) and Fastenal (Nasdaq:
FAST).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
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Here are highlights from Monday's Analyst Blog:
Earnings Season Now Underway
The fourth quarter earnings season is over, and now the focus
turns to the first quarter. While it "officially" kicks off after
the bell today when Alcoa (NYSE: AA) reports, we already
have 26 (5.2%) first quarter reports in from the S&P 500.
Alcoa, though, like the Master's -- is but the first of the
majors. It will not be the only one in the early going. We will
also hear from Google (Nasdaq: GOOG), J.P. Morgan
(NYSE: JPM) and Bank of America (NYSE: BAC) this week.
Together, they should provide some good clues to the overall
direction of earnings season.
One firm which is not a household name but we be good to keep an
eye on is Fastenal (Nasdaq: FAST). It is the number one
maker of fasteners -- things like screws and bolts -- which go into
all sorts of other things. If it reports strong results, it is a
good bet that the rest of the market will, as well.
Good Start, but Earnings Growth to Slow
While far too early to draw any conclusions, it looks like we
are off to a good start on the first quarter, with reported net
income growth of 22.7%, down just slightly from the 25.7% growth
those same 26 firms reported in the fourth quarter. That, however,
is not expected to last. The consensus is looking for a dramatic
slowdown in growth for the remaining firms, with total net income
rising just 7.71%.
Financial firms setting aside much less than a year ago for bad
debts were a big part of the earnings story for the fourth quarter,
and a big part of the deceleration in year-over-year growth has to
do with a much higher base, particularly in the Financials in the
first quarter of 2010 than in the fourth quarter of 2009. If the
Financial sector is excluded, total net income rose 19.8% from a
year ago, in the fourth quarter, and in the first quarter it is
expected to slow to 9.3%.
Positive Surprises Expected?
Given the trend of positive earnings surprises, I would be
shocked if the actual growth rate is that low. It is almost certain
to be in the double digits again. Revenue growth in the fourth
quarter was healthy at 8.28%. Looking ahead to the first quarter,
though, those firms yet to report are expected to post
year-over-year revenue growth of just 4.14%.
Financials are the key reason for the slowdown in revenue
growth; if they are excluded, reported revenue growth is expected
to be 9.08%. Tougher year-over-year comparisons are a big part of
the story.
Net Margins to Expand Slightly
Net margin expansion has been a driver of earnings growth, but
that expansion is slowing down, particularly if one excludes the
Financials. Overall, net margins are expected to come in at 9.03%
in the first quarter, up from 8.73% a year ago, and from 8.92% in
the fourth quarter. However, excluding the Financials, net
margins are expected to only creep up to 8.29% from 8.27% a year
ago, and down from 8.81% in the fourth quarter.
Among the handful of S&P 500 companies that have already
reported for the first quarter, overall net margins are 7.92%, up
sharply from 7.06% a year ago and from 7.06% in the fourth quarter.
Strip away the Financials that have already reported and the
picture is different, rising to 7.62% from 7.86% a year ago and
from the 7.30% reported in the fourth quarter.
Do not make too much of the level of reported net margins being
significantly lower than the expected net margins. That is due to
the reporting firms being very overweighted towards retailers (many
have February fiscal period ends), which tend to be lower-margin
businesses.
On an annual basis, net margins continue to march northward. In
2008, overall net margins were just 5.88%, rising to 6.39% in 2009.
They hit 8.59% in 2010 and are expected to continue climbing to
9.59% in 2011 and 10.31% in 2012. The pattern is a bit
different, particularly during the recession, if the Financials are
excluded, as margins fell from 7.78% in 2008 to 7.09% in 2009, but
have started a robust recovery and rose to 8.24% in 2010.
They are expected to rise to 8.84% in 2011 and 9.37% in
2012.
Another Good Year Overall?
The expectations for the full year are very healthy, with total
net income for 2010 rising to $790.5
billion in 2010, up from $545.1
billion in 2009. In 2011, the total net income for the
S&P 500 should be $909.5 billion,
or increases of 45.3% and 15.1%, respectively. The expectation is
for 2012 to have total net income passing the $1 Trillion mark to 1.036 Trillion.
That will also put the "EPS" for the S&P 500 over the
$100 "per share" level for the first
time at $108.50. That is up from
$57.13 for 2009, $83.16 for 2010, and $95.67 for 2011. In an environment where the
10-year T-note is yielding 3.54%, a P/E of 16.1 based on 2010 and
14.0x based on 2011 earnings looks attractive. The P/E based on
2012 earnings is 12.3x.
With far more estimates being raised than being cut (revisions
ratio of 1.32), one has to feel confident that the current
expectations for 2011 will be hit, and more likely exceeded.
Analysts are raising their 2012 projections at an even higher rate,
with a revisions ratio of 1.74. While a lot can happen between now
and the time the 2012 earnings are all in, upward estimate momentum
means that the current 2012 earnings are more likely to be exceeded
than for them to fall short.
This provides a strong fundamental backing for the market to
continue to move higher. The fact we are in the third year of the
presidential cycle (almost always the best of the four, and by a
big margin). We have a Democrat in the White House, which has
historically meant good things for the stock market, with an
average annualized return over the last 50 years more than triple
that when the GOP holds the Oval Office. Few, if any, binomial
variables have as much statistical significance. Those factors
should combine to make this a good year for the market.
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