5 Reasons to Worry About Next Week

The economy is showing signs of fumbling the recovery.

Things seemed to be moving in the right direction, but now's when things get interesting. Workers are cracking open their first paychecks of 2013, and some may be surprised to see that the stimulus plan that lowered Social Security taxes from 6.2% of a salary to 4.2% over the past two years ended last month. Their take-home pay is now 2 percentage points less, and that may start to weigh on how they go about spending money in the future.

The news isn't just iffy on the macro level. There are also 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.

Company

Latest-Quarter EPS (Estimated)

Year-Ago Quarter EPS

Advanced Micro Devices (NYSE: AMD  )

($0.20)

$0.19

CSX (NYSE: CSX  )

$0.39

$0.43

Apple (NASDAQ: AAPL  )

$13.41

$13.87

Netflix (NASDAQ: NFLX  )

($0.12)

$0.73

SanDisk (NASDAQ: SNDK  )

$0.73

$1.29

Source: Thomson Reuters.

Clearing the table
Let's start at the top with AMD. If you haven't noticed, the PC industry is in a slump. Folks aren't upgrading their desktops and laptops the way they used to. Why should they? Smartphones and tablets are cheaper, allowing them to surf the Web and stream media in a portable form. Sure, there are plenty of times where a real computer is necessary, but die-hard gamers and hardcore computer users don't have to upgrade every time that a new Windows update rolls out.

AMD's in a bind. As the world's second-largest maker of microprocessors, it's the silver medalist in a shrinking category. It's not just about reversing last year's profit. Revenue is expected to fall 32% to $1.15 billion. Analysts see the red ink lingering, too. Wall Street doesn't see AMD posting another profit on an annual basis until 2015. That may be optimistic if AMD can't diversify into other growth markets.

There's also a bit of an unwelcome trend with AMD. The company has missed Wall Street's profit projections in each of its two previous quarters. If AMD ever expects to get its shares back into the double digits -- something that hasn't consistently happened since 2007 -- it's going to have to get its revenue and earnings moving in the right direction again.

CSX is a railroad operator. There are a few rail companies reporting next week, giving investors a great snapshot of the transportation niche. The pros see CSX choo-choo-ing its way to a profit of $0.39 a share, just below the $0.43 a share it rang up a year earlier. The good news here is that CSX has actually surpassed analyst profit targets in each of the past three quarters.

Apple is a name that may surprise some people next week. Investors know that the class act of Cupertino has fallen out of favor, but not too many realize that this appears to be the first time in a long time that Apple will post a year-over-year decline in net income.

It wasn't always this way. Three months ago, the analyst consensus estimate was calling for Apple to earn $15.43 a share during its holiday quarter, and now that forecast has been whittled all the way down to $13.41 a share. Longtime Apple trackers will be quick to point out that the company has a long history of issuing conservative guidance that stumps the market, but that hasn't been the case lately. Apple has come up short in three of the past five quarters, and that includes stumbling during the past two periods.

Netflix is still growing, but its bottom line is likely to be as red as its signature red mailer. Netflix warned late last year that profits in its domestic business would be unlikely to overcome the losses incurred as the video service expands its international streaming business.

Wall Street still sees revenue climbing 7% higher during the quarter, and subscriber growth should be even higher than that. Average revenue per subscriber has been shrinking as members trade down from multi-DVD plans to the cheaper $7.99 a month streaming option. A silver lining for Netflix here is that it has blasted through analyst profit forecasts with ease over the past year.

Finally, we have SanDisk. The flash memory giant was posting monstrous growth as more gadgets were leaning on flash for data storage. It has become a more competitive market lately, and that's weighing on margins. The pros see revenue slipping just 3%, but profitability will take a 43% hit.

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 translates 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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2013, at 11:32 AM, artlaz wrote:

    While Apple has missed analyst's estimates the last three out of 5 quarters, it blew away analyst's estimates the other two, and beat its own guidance all 5 quarters. In hindsight it is clear the three misses were related to one issue, the launch of a new iPhone. The Dec 2012 quarter Apple guided $9.30 and turned in $13.87, a 45% beat, then proceeded to guide $8.50 for the March quarter and crushed that number with a $12.30 actual EPS, a 48% beat. The three missed quarters were explained in the conference call as being related to either pulling iPhone sales forward into the next quarter or backwards (as happened in Q3 last year) into the prior quarter. If you averaged the beats and the misses, smoothing out results for iPhone launches, you get a different picture. The setup going into this quarter looks a lot like a year ago.

  • Report this Comment On January 18, 2013, at 1:21 PM, ConstableOdo wrote:

    Apple is done for as far as shareholders are concerned. Google hasn't beat its numbers nearly as much as Apple has and yet Google's share price remains high and the P/E hasn't compressed much at all. It doesn't matter how much Apple beats its numbers. It won't be enough.

    Wall Street is betting on Apple to fail in the future and will do anything to make it well-known to investors that Apple is a poor investment. I'm willing to bet if Apple sold twice as many iPhones the share price would barely move and the P/E would just compress that much further. Apple's P/E is surely heading for solid 10s over the next couple of years.

    It's companies like Amazon and Netflix Wall Street wants to succeed whether they make any profits or not. That's why those companies' share prices continue to climb while profit-making Apple's share price continues to fall. The hedge funds are simply holding Apple in place while moving smaller and less profitable companies up in share price.

  • Report this Comment On January 18, 2013, at 8:53 PM, mazske wrote:

    You mentioned the 2% increase back to the old rate for Social Security withholding's. I was expecting that, so no problem.

    However, a surprise to me is my federal tax withholding went up quite a bit. I called my job's finance person and I was told that the 2013 tax withholding's tables increased the amount of taxes withheld across all rates.

    What in the world is this? If my middle class tax rate is staying the same, why is the government doing this?

    My goal is to get as close as possible to breaking even on my taxes. Meaning, I don't want a refund and I don't want to pay anything. If they withhold as much as they did, I'll get about a grand back in a refund. I don't want that.

    That means the government is ripping us off and using our money as an interest free loan.

    Is anyone else having their employer withhold more in federal tax? I work for a local government agency and I think they would have it right. The person says she follows the IRS tables to the T.

    If this is really happening, which according to my first paycheck, it is, I plan to see if I can adjust my withholding amount to have them take out less.

    If it's true the tables were increased, what in the world is happening? Can anyone explain that to me?

  • Report this Comment On January 19, 2013, at 10:45 AM, 48ozhalfgallons wrote:

    "If it's true the tables were increased, what in the world is happening? Can anyone explain that to me?"

    Uh, Obama got elected.

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