A Review of U.S. Earnings, April 16-20, 2012 (XLK, XLF, XLY, XLI)
Earnings were mostly positive for Q12012 as investors remain hopeful for Q2 2012
Many US companies reported earnings this past week, April 16, 2012. During earnings season, the stock market can be significantly influenced based on the financial results reported from US companies. For this particular earnings season, many analysts hope that the earnings season can help propel the stock market out of its most recent slide.
Technology Sector Earnings:
Beginning with the Technology sector (NYSEARCA:XLK): on Tuesday, April 17 after the closing bell, IBM (NYSE: IBM) reported that its first quarter operating earnings were $2.78 per share, up from $2.41 per share from 2011 (15.4% increase). This increase in earnings beat the consensus estimate of $2.65 per share; IBM also increased its full year operating EPS forecast to at least $15.00, which also beat the consensus estimate of $14.93. The stock opened lower on Wednesday and continued its decline throughout the day, closing at $200.13, which was the lowest level in the past month and also below IBM’s 50-day moving average.
On Thursday, April 19 after the closing bell, Microsoft (NASDAQ: MSFT) reported that its Q3 2012 earnings beat expectations with a 6% increase year-over-year to $17.41 billion revenue and 12% increase to $6.37 billion in operating income. (Note: Microsoft already has recorded two quarters for 2012 based upon its fiscal year, with this latest report standing as its Q3 2012). The company’s numbers broke down to $4.57 billion in revenue from Servers & Tools, a $5.81 billion revenue from the Business Division (which includes the well-known Microsoft Office line of products), a $4.62 billion profit from Windows and Windows Live, and $707 million increase from its Online Services division. All of these divisions reported revenue increases between 4% to 14%.
If there was a negative for Microsoft, it would be that its Entertainment & Devices division dropped a sharp 16% year-over-year to $1.62 billion in revenue. Microsoft’s explanation was that the weaker results for its Entertainment & Devices division was due to a “soft gaming console market,” though its Xbox 360 gaming system remained the number 1 console in the U.S. market for the 15th straight month. The Entertainment & Devices drop off lowered its profit level 2.4% from the same period in 2011. However, due to the fact that Microsoft’s earnings and revenues were greater than the consensus estimates, Microsoft’s shares increased 2.9% in after-hours trading to $31.91 per share.
Advanced Micro Devices (NYSE: AMD) announced its first-quarter 2012 earnings after the closing bell on Thursday, April 19, and it also beat Wall Street’s estimates in terms of operating income, even though AMD posted a net loss on one-time charges. AMD stated that its Q1 operating earnings were $138 million at 12 cents a share, which was about 4 cents above the consensus estimates. The company’s revenue, which didn’t increase much from 2011 levels, was $1.61 billion, $.05 billion higher than the consensus estimates of $1.56 billion.
The negative news for AMD is that it did report a net loss of $590 million, or 80 cents per share for a few one-time events, including selling ownership of its chip lines to GlobalFoundries of Abu Dhabi and acquiring private company SeaMicro.
However, this negative news did not damper the continuing enthusiasm surrounding AMD’s stock, as it rose another 2% in after-hours trading to $8.12 per share. Much of this enthusiasm is attributed to the fact that new management’s initiatives and shedding of its capital-intensive semiconductor fabrication plants are finally starting to deliver some tangible results in the company’s bottom line and in the minds of investors.
Yahoo Inc. (NASDAQ: YHOO) reported on Tuesday, April 19, that its Q1 earnings increased by 28%, beating Wall Street’s estimates despite the fact that Yahoo’s revenue was virtually flat for the period. Yahoo’s reported net income was $286 million, 23 cents per share, versus $223 million, 17 cents per share, over the same period in 2011.
Yahoo did report that its revenue was flat which was pretty much in line with Wall Street’s estimates. Yahoo’s revenue broke down to a 1% increase to $1.08 billion for revenue excluding traffic-acquisition costs, a 4% decline to $471 million in display revenue excluding traffic-acquisition costs, and an 8% increase to $357 million in search revenue. The end result of Yahoo’s earnings report was that its shares rose nearly 2% in after-hours trades, due mostly to the fact that Yahoo outperformed market expectations.
One word of caution about Yahoo’s earnings report: It is already forecasting that the Q2 2012 earnings may not meet analysts’ expectations, which may turn some investors off on this stock long-term.
EBay Inc. (NASDAQ: EBAY) reported its earnings on Thursday, April 19; its earnings per share rose $5.85 to $41.73 per share. EBay reported a profit of $570 million over the first quarter, which translates to 44 cents per share and recorded $3.3 billion in revenue. These numbers compare favorably to results over the same period in 2011, which were $476 million, 36 cents per share, on $2.55 billion in revenue.
The earnings levels reached by eBay had not been reached since October 2007. This prompted several analysts to raise their ratings on eBay’s stock, while most analysts proclaimed that eBay is showing better business execution. EBay’s shares rose more than 16% during trading on Thursday.
Financials Sector Earnings:
Turning our attention toward the Financials sector (NYSEARCA:XLF), Goldman Sachs (NYSE: GS) reported its first quarter earnings on Tuesday, April 17 were more than double from the same period in 2011. Goldman Sachs earned $2.1 billion, $3.92 per share, which was up from $908 million, $1.56 per share from 2011. These numbers easily beat the consensus estimate of $3.55 per share.
Goldman’s impressive jump in earnings was mostly attributed to its institutional client services, as its revenue jumped from $3.0 billion in the Q4 2011 to $5.7 billion in Q1 2012. Goldman’s investing and lending business also did its part, as it went from $872 million to $1.9 billion. Goldman’s investment banking business only posted modest gains, while its investment management unit showed a slight drop in revenue.
American Express (NYSE: AXP) reported its first quarter net income on Wednesday, April 18. AMEX reported earnings per share of $1.07 on revenues of $7.6 billion, beating analysts’ forecasts of $1.01 per share and around $7.47 billion revenue. The earnings from Q1 2012 also showed an increase of 0.4% over the same period from a year ago when earnings per share were $0.97 and revenues were $7.57 billion.
Consolidated total revenues net of interest expense increased from $7.03 billion in Q1 2011 to $7.61 billion in Q1 2012, an increase of roughly 8%. This gain was due to increasing card member spending and higher net interest income due to increasing growth in the loan portfolio. As a result of this great news, American Express announced that it was increasing its quarterly dividend by 11% to $0.20 per share. American Express also plans to repurchase up to $4 billion of outstanding shares in 2012, as well as an additional $1 billion in Q1 2013.
Bank of America (NYSE: BAC) reported its Q1 2012 earnings on Thursday, April 19, and the news was not good: its earnings fell to $328 million for common shareholders, equaling 3 cents per share. The decline was largely due to the fact that one-time accounting adjustments wiped out virtually all of its $5 billion profit. Compared to previous years, B of A had a $1.6 billion gain in Q4 2011 and a $1.7 billion gain in Q1 2011. In addition, the 3 cents per share was far below analysts’ expectations of 12 cents per share.
If you exclude the accounting charges of $4.8 billion from the narrowing of B of A’s credit spreads, its earnings per share actually rose to 31 cents per share, an increase of 35% from Q1 2011. This factored out increase led to B of A’s shares climbing to around $9.04 by mid-morning, a gain of about 1%. Overall, B of A continues to climb, as its shares have increased over 60% after its precipitous fall in 2011.
Morgan Stanley (NYSE: MS) reported its first quarter earnings on Thursday, April 19, the results of which pleased investors, as the earnings easily surpassed analysts’ expectations and led to a Morgan Stanley stock rise while the rest of the market largely struggled on Thursday.
Morgan Stanley’s revenue rose from $7.8 billion to $8.9 billion, easily surpassing the $7.6 billion analysts were expecting. Earnings per share came in at 71 cents as compared to the 44 cents as predicted by analysts. It is important to note, though, that the results did not include a big accounting charge that was related to a change in the value of Morgan Stanley’s debt.
Consumer Sector Earnings:
Turning our attention to Consumer stocks (NYSEARCA:XLY), Coca-Cola (NYSE: KO) reported its Q1 2012 earnings on Tuesday, April 17, and the results were better than analysts predicted. Coca-Cola’s earnings were $2.05 billion, 89 cents per share, higher than the 82 cents per share in Q1 2011. The main reason for this increase was the increasing number of sales of Coca-Cola’s products, especially in India, as volume there increased by 20%.
Coca-Cola’s revenue grew by 6% to $11.14 billion, an increase from the $10.5 billion from Q1 2011. In addition to the 20% volume increase in India, there was a 9% volume increase in China and a 4% volume increase in Brazil.
Johnson and Johnson (NYSE: JNJ) also reported its Q1 2012 earnings on Tuesday, April 17. Its sales dropped by 0.2%, leading to $16.1 billion revenue, missing analysts’ expectations by around $200 million. If one-time results are excluded, however, Johnson and Johnson’s earnings were actually a bit above expectations at $3.9 billion, $1.37 per share.
Johnson and Johnson excelled in overseas markets, as its sales increased by 4.1%. This increase helped to make up for a lackluster performance in the U.S. market, where revenue decreased 5.1% to $7.2 billion. Johnson and Johnson blamed the weak U.S. numbers on generic competition to Levaquin and a suspended plant affecting the sales of the ovarian cancer treatment Doxil. Levaquin and Doxil sales fell a staggering 93% down to a combined total of $29 million. Johnson and Johnson’s shares were trading slightly higher in pre-market trading on Tuesday morning.
Yum! Brands, Inc. (NYSE: YUM), the company which owns Taco Bell, Pizza Hut, and Kentucky Fried Chicken, reported its Q1 2012 earnings on Thursday, April 19. The results were a 73% increase in earnings thanks to a combination of strong overseas sales and a rebound in U.S. sales.
Yum’s net income was $458 million, 96 cents per share, increasing from the $264 million, 54 cents per share, in 2011. If you exclude one-time items, the income amount was 76 cents per share. Yum’s revenue increased 13% to $2.74 billion, higher than analysts’ forecasts of $2.71 billion and 73 cents per share.
This positive report led to Yum increasing its earnings-per share growth forecast for 2012 by at least 12%, a minimum of $3.22 per share. This is higher than its last 2012 forecast of 10%.
McDonald’s Corp. (NYSE: MCD) reported its Q1 2012 earnings on Friday, April 20 before the opening bell. McDonald’s reported higher quarterly profit thanks to the strong sales at their established U.S. restaurants, while Q1 2012 sales at restaurants worldwide open at least 13 months were up 7.3%, which was higher than the 6.7% predicted by analysts.
In terms of net income, McDonald’s matched analysts’ expectations with $1.27 billion, $1.23 per share. This was an increase from $1.21 billion, $1.15 per share, from the same period in 2011. Revenues narrowly beat analysts’ expectations, as McDonald’s reported a 7% increase to $6.55 billion, while analysts expected $6.54 billion.
McDonald’s said that its earnings were helped by several factors for Q1 2012: The additional day due to Leap Year 2012, the unseasonably warm weather, and the combination of its mainstay products and its new Chicken McBites.
Industrial Sector Earnings:
Turning to the Industrials sector (NYSEARCA:XLI), Dupont (NYSE: DD) reported its Q1 2012 earnings on Thursday, April 19. Earnings exceeded analysts’ estimates due to the unusually warm weather experienced by the United States and Europe over the winter of 2011, which increased the sales of genetically modified seeds.
Dupont’s net income increased by 4%, rising from $1.43 billion and $1.52 per share in Q1 2011 to $1.49 billion and $1.57 per share in Q1 2012. If you exclude the costs from the damage done by the herbicide Imprelis, the earnings per share were $1.61, which beat Bloomberg’s composite estimates of $1.53.
In addition to the mild winter, there was an increase in the demand for corn-seed in Brazil. This led to seed sales rising by 20% to $3.2 billion. As a result, according to the Department of Agriculture, the largest corn crop in the United States since 1937 is being planted ahead of schedule. Dupont’s shares fell 1.2% percent to close at $52.61, possibly influenced by declines in the electronics unit and in the Asia-Pacific region, which led to a 2% decline in sales volumes.
General Electric (NYSE: GE) delivered its Q1 2012 earnings report on Friday, April 20. Its first quarter profits declined from the same period in 2011, but still managed to beat analysts’ forecasts thanks mainly to higher industrial sales. First-quarter net earnings fell 10% to $3.03 billion, while earnings per share declined 6% to $0.29. Looking forward, GE says it’s on track for double-digit earnings growth in 2012 in both GE Capital and its Industrial businesses.
Executive Summary:
Breaking down the earnings reports by sectors, the Tech sector (NYSEARCA:XLK) had mostly positive news, as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), AMD (NYSE:AMD), Yahoo (NASDAQ:YHOO), and eBay (NASDAQ:EBAY) all reported better-than-expected earnings. The negative news involving this sector centered around the decline in Microsoft’s entertainment sector, AMD’s net loss, and Yahoo’s decline in display revenue.
In the Financials sector (NYSEARCA:XLF), Bank of America’s (NYSE:BAC) disappointing earnings was the biggest news, though much of that was due to the accounting charge that wiped out nearly $5 billion in profit.
In the Consumer sector (NYSEARCA:XLY), the biggest news was that Johnson and Johnson (NYSE:JNJ) had disappointing earnings due to the sharp declines in sales of both Levaquin and Doxil. Strong overseas sales prevented earnings from being even lower.
In the Industrials sector (NYSEARCA:XLI), Dupont (NYSE:DD) experienced better-than-expected earnings largely due to the milder winter in the U.S. and Europe, along with an increased demand for corn-seed in Brazil.
Bottom Line: For the most part, companies are reporting better-than-expected earnings, which should help to spur upward momentum in the stock market, though a period of profit-taking and fallback should be expected, especially as we come closer to May and summer, where stocks typically fall back. The long-term outlook, however, appears to be bullish, especially if companies continue to beat analysts’ earnings expectations as most of them did this past earnings week.
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