The bar has been set very low for third quarter earnings, with consensus estimates calling for a 1.8% year-over-year decline. Five sectors expect to show declines, led by Materials (-18.8%) and Energy (-18.6%), while the Consumer Discretionary, Financial, and Industrial sectors are each expected to show growth of ≥ 4.5%.
Consumer Discretionary Sector: Good and bad news should lead to modest growth.
We expect the good news to come from strong emerging market growth, better cost controls and share buybacks. We suspect the bad news to be a result of a slowing in developed international markets, such as, Europe and Japan.
As for the specific industries in the Consumer Discretionary sector, we believe Media will see a healthy boost in TV advertising, possibly election driven. We also expect to see growth in digital revenues. For automakers, we expect higher sales to be driven by pent-up demand and product upgrades. We expect double-digit EPS growth for apparel retailers, because last year the industry dealt with debt downgrades, high cotton prices, and a hyper competitive market.
We expect specialty retailers to do well with the improving housing market; however, we still expect bad news from consumer electronics and office supply stores. Footwear manufacturers will likely report weak earnings because of weak demand from Europe and China. Homebuilders might provide a bright spot, as a result of the nascent recovery in the housing market. It is likely that both restaurants and hotels will remain weak because of stagnant growth, conservative consumers and international headwinds.
Consumer Staples: Modest growth expected.
For the good news, we expect higher prices, but don’t expect to see the full impact from drought-induced higher prices. Some commodities, such as, coffee, cocoa and sugar, are lower though. Bad news in Consumer Staples will be a result of weak volumes due to higher prices and weak foreign currencies.
As for the industries, we expect beverages will be hurt by foreign exchange rates. Tobacco is still experiencing a good pricing environment, and spirits and wine should be helped by price hikes and volume growth. Household products are expected to have accelerated growth from second quarter thanks to less input cost pressures, but they will likely still have a slight decline in year-over year revenues.
We expect retail food stores to be weak for a variety of reasons: Increased price competition from discount dollar stores and economic consumer pressures, such as, high gas prices and unemployment.
Energy: Again, expect big decline in earnings (-18.6%)
Though oil prices are up, production at the dominant companies is expected fall. Additionally, natural gas prices have tumbled about 30%, so those focused heavily on natural gas will likely suffer. Overall oil services operating margins will likely contract, possibly as a result of reduction in available rigs.
Financials: Expect decent growth, helped by accommodative Fed Reserve and federal government policies.
Profits of banks are expected to be driven by loan growth at nearly 3%. If you remove Bank of America (NYSE: BAC), loan growth will probably be closer to 5%. Net interest income will probably be down 1.6% from last year, but again removing BAC, a gain of 0.2% is expected. Though total net revenues are expected to fall 3.3%, declining loan loss provisions and tighter controls on non-interest expenses should help. Once again, remove BAC from the metric, and the industry is looking at a likely profit growth to of more than 12%. With BAC, the industry may see a 6% drop.
Life Insurers have been hurt by low interest rate environment, which will weigh on net interest income. Retail REITS should do fairly well as a result of strong demand, low levels of new construction, and a more favorable financing environment.
Healthcare: Expect a 4.5% decline largely because of big pharmaceutical players.
With only Abbott Labs (NYSE: ABT) bucking the trend (+8.5%), we expect a decline of 12%, because of patent expirations. Generic drug manufacturers and drug distributors should benefit from the patent expirations, so we expect anywhere from 8% to 13% growth.
Industrials: Expect growth to moderate a bit, but still looking at about 4.5% growth.
Going along with recent pre-announcements, we’ll probably see conservative and somewhat cautious guidance for the coming months. Construction-related industries, including building products and construction equipment, are expected to post solid earnings gains. Building products should be helped by the improving trends in housing and home improvement. Construction equipment should be helped by the fact that much of the current equipment is aging and needs to be replaced, particularly here and in Europe. The need for a more advanced infrastructure in emerging markets should also benefit these industries.
Commercial aerospace should improve because of higher production rates and large order backlogs. Airlines will likely benefit from slight rate increases, but more importantly, from keeping capacity in check with fewer flights. Logistics companies expect to report sluggish results, with less robust freight trends and difficulties in raising fees. Trucking companies have seen a pronounced slowing in shipments, as a result of customers tightening their inventory levels.
Budgetary gamesmanship, pressures, etc are weighing on defense companies, as the Defense Department is delaying new programs.
Information Technology: Economic growth, or a lack thereof, is hurting IT budgets, and in turn technology companies, but there should be some areas of strength.
Some chipmakers should benefit from supplying big names like Samsung and Apple (NASDAQ: AAPL). Consumers of traditional desktop PCs are awaiting the release of Windows 8. Others are looking more for tablets. We could see announcements of new tablets just ahead of the important holiday season. Basically, some of those traditional PCs are either out-of-favor or out-of-date.
Materials: Expect to see worst decline of all 10 sectors (-18.8%).
The industry has suffered because of weak metals prices, weak demand from China, and excess production capacity. China, by itself, is sitting on about 16 million tons of unsold alloy. However, the bright spot should be chemicals producers, which are expected to post a modest EPS gain from last year, as they have been aided by lower natural gas costs.
Telecom: Expect an up-and-down quarter from this sector.
Wirelines should be helped by broadband growth, with college students heading back to campus; however, the sluggish overall U.S. economy will likely put a dent in growth. In the wireless market, smartphone demand will likely be muted as consumers delayed purchases. Consumers were waiting on the release of the iPhone 5, which was released at the start of the fourth quarter. Tower Providers could see some strong results, as carriers continue to roll out more advanced Long-Term Evolution (LTE) networks. On the back of this, data usage should continue to expand over the next 18 months, as more consumers adopt LTE smartphones.
Utilities: Should be weather driven, but many should be helped by rate increases they’ve implemented over the last 12 months.
With the weak economy, many households have been forced to cut back on power usage to save money. Electric utilities companies should benefit from warmer than usual weather, while wholesale power operators may be negatively affected by higher operation and maintenance expenses from various pollution controls. This should be partially offset by lower fuel and purchased power costs. Gas Utilities should be helped by an increased use of natural gas as a fuel by power generators.
If all else fails, at least fourth quarter and 2013 results are expected to be much brighter with 10% and 12%, respective, gains in profits.
At Henssler Financial we believe you should Live Ready. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
