Earnings Likely to Continue to Rise, but at a Slower Pace

For the week of Monday, March 5, 2012 through Friday, March 9, 2012:

• Standard & Poor’s 500 Index: .09%
• Dow Jones Industrial Average: -0.43%
• NASDAQ Composite: 0.41%

The markets saw the largest sell off this year at 1.6% or nearly 200 points, since November 2000. Generally, the markets experience a 5% drop about three times a year, so this mid-week drop does not worry us.

We see an overall possible slowing of earnings growth in the future. Productivity costs are increasing, because companies are beginning to hire unskilled labor. Thus productivity does not increase quickly. Companies are in a position to make capital investments, since most have been running very lean the past four years. Generally, during an economic downturn, companies wait as long as they can before they lay off workers. Likewise, during an economic expansion, they delay hiring for as long as possible. We believe earnings will continue to rise, but likely at a slower pace.

Economic Data

• ISM Services Index
  • The ISM nonmanufacturing index for February was better than expected, rising from 56.8 to 57.3.
  • This is the third consecutive monthly increase and puts the index well above its fourth quarter average of 52.5.
• Productivity and Costs
  • Nonfarm business productivity was revised upward for the fourth quarter of 2011, to 0.9%.
    • The change came from an upward revision to output and a downward revision to hours worked.
  • Unit labor costs saw a large increased revision to 2.8% following a higher revised hourly compensation reading.
  • Unit labor cost growth remains low on a year ago basis, and productivity growth is slowing.
    • Both of these factors are supporting labor demand.
• ADP Jobs Report
  • Employment increased by 216,000 in February, just above the predicted 215,000.
  • Goods-producing industries, including manufacturers and construction companies added 46,000 workers.
    • 21,000 of those jobs were factory workers.
  • Service providers added 170,000 to their payrolls.
    • Large companies of more than 500 employees created 20,000 jobs.
    • Medium-sized businesses with 50-499 employees expanded by 88,000 jobs.
    • Small companies of 50 or less employees increased by 108,000.
• Jobless Claims
  • Jobless claims pushed modestly higher in the latest week rising by 8,000 claims from 354,000 to 362,000. Continuing claims also rose in the week.
    • Prior week data was revised from 351,000 to 354,000.
  • Although there was an increase, the labor market remains well positioned.

Earnings

• Dick’s Sporting Goods Inc. (NYSE: DKS)
  • Every item at Dicks Sporting Goods is a discretionary spending item.
    • Strong sales are an indicator that the consumer is feeling better about himself.
  • Dick’s Sporting Goods earnings rose 27% aided by strong sales online and at its Golf Galaxy stores.
  • The company reported net income of $111.1 million, or $0.88 a share versus $87.5 million, or $0.71 a share last year.
  • The sporting goods retailer said that milder than usual weather hurt fourth quarter sales, but that it would still meet expectations.
• American Eagle Outfitters (NYSE: AEO)
  • American Eagle Outfitters’ profit dropped 41% on charges for the reduced value of some of its stores and higher cost for products and expenses related to an executive transaction.
  • Revenues rose 14%, but the retailer said it had to take more markdowns during the quarter to drive holiday sales.
  • Its adjusted earnings met Wall Street’s expectations although earnings fell to $51.3 million, or $0.26 a share, from $87 million, or $0.44 a share last year.
  • Removing store impairment charges and executive transactions, earnings per share came in at $0.35.
  • Analysts expect first quarter EPS of $0.10.
• Brown-Forman Corporation (NYSE: BF)
  • Brown-Forman posted a smaller profit on lower than expected sales of its alcoholic beverages.
  • Net sales slipped 0.4% to $959 million, missing analysts forecast of $1 billion; however, given currency exchange and its exit from a wine business, its sales rose by 7%.
  • Brown-Forman cited strong gains in markets like Germany, Russia and Canada, but had weaker performances in places like China and Greece.
  • The company expects full year earnings per share between $3.50 and $3.65, versus the $3.65 analysts are projecting.
• Smithfield Foods, Inc. (NYSE: SFD)
  • Smithfield Foods’ fiscal third quarter earnings fell 61% on restructuring charges and higher costs.
  • For the quarter ended January 29, the company reported a profit of $79 million, or $0.49 a share, down from $202.6 million, or $1.21 a share, a year earlier.
  • Sales jumped 9.2% to $3.48 billion, aided by higher average prices and volume in the pork segment.
  • Gross margins fell to 10.9% from 14.3%, as input costs jumped 14% to $3.1 billion.

Interest Rates

• Rates ticked up slightly this week. The biggest move was five basis points.
• The two-year Treasury rose one basis point to 0.30%, inching closer to a new six-month high.
• The five-year Treasury fell three basis points to 0.86%; up more than 15 basis points since bottoming out in late January.
• The 10-year Treasury fell three basis points to 1.99%, just above the year-to-date average.
• The 30-year Treasury held flat at 3.15%, but it continues to hold above the key 3% mark.

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.