We're just dipping our toes into earnings season. Why is the water so cold?
This should be a great time for companies. The economy is improving. Consumer confidence is taking baby steps in the right direction. Corporate profitability should be shooting through the roof. Right?
Well, not right.
There are more than a few companies that aren't pulling their own weight in this supposed economic recovery.
There are still plenty of names posting lower earnings than they did a year ago. Let's go over a few of the companies that are expected to go the wrong way on the bottom line next week.
Latest Quarter EPS (estimated)
Year-Ago Quarter EPS
|Southwest (NYSE: LUV )||($0.06)||$0.03||Add|
|Bank of America (NYSE: BAC )||$0.12||$0.17||Add|
|E*TRADE Financial (Nasdaq: ETFC )||$0.09||$0.16||Add|
|Freeport-McMoRan (NYSE: FCX )||$0.85||$1.58||Add|
|SanDisk (Nasdaq: SNDK )||$0.70||$1.03||Add|
Source: Thomson Reuters.
Clearing the table
Let's start at the top with Southwest.
The no-frills air carrier that loves to promote its low fares and "bags fly free" policy isn't expected to turn a profit when it reports next week. Analysts see revenue climbing nearly 30% in its latest quarter, but don't go assuming that business is booming because of its ads that mock rival carriers that charge passengers for baggage.
Southwest's top line is spiking largely because it completed the acquisition of the smaller AirTran in May of last year. It won't be until the second half of the year that investors get an apples-to-apples comparison.
In the meantime, Southwest is just getting by. March traffic actually slipped 1% for the combined airlines, but passengers were willing to pay 5% more. Unfortunately, you probably know that pesky jet fuel prices have climbed a lot higher than that. Southwest has historically been good about hedging energy prices, but the pros still see last year's quarterly profit reversing itself next week.
Bank of America is the "too big to fail" banking giant that's on a long road to public redemption. Investors seem to have forgiven the financial services heavyweight. Bank of America is the Dow 30's biggest gainer this year, up 65% so far in 2012.
Wall Street sees Bank of America's fundamentals improving during the balance of this year, but those same pros see profitability declining significantly when it reports on Thursday.
E*TRADE is the discount broker that many people know for its talking baby television ads. Discounters have struggled in a climate of cutthroat commission rates and rock-bottom interest rates. E*TRADE used to promote the chunky interest rates available through its online savings accounts, but that's just not feasible these days.
Freeport-McMoRan has some gold mining interests, but copper remains its bread-and-butter business. Unfortunately for Freeport and its copper mining peers, the metal has been out of favor lately. Freeport-McMoRan did boost its dividend rate higher two weeks ago, but a 3.5% yield is merely a consolation prize when net income is cascading.
Finally, we have SanDisk. The world's leading flash memory manufacturer should be doing better than its bottom line suggests. Flash memory has become the storage platform of choice in cameras, some netbooks, and most portable devices.
But SanDisk analysts are only holding out for earnings of $0.70 a share, well below the $1.03 a share it rang up a year earlier.
Why the long face, short-seller?
These companies have seen better days. The market has rewarded many of these stocks with reasonable gains over the past year, but they still haven't earned those upticks. Lower earnings translate into higher earnings multiples, and nobody wants to see that happen.
The good news here is that Wall Street already expects these companies to deliver shrinking bottom lines. In other words, the bad news is already baked into the shares.
The more I think about it, the less worried I become.
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