First quarter earnings season guide

So the 1st Quarter for most U.S. companies ended on March 31st. Back in olden days it would take companies a long time to close their books and so most of them would report their earnings about 6 weeks after the close of the quarter. But with today’s super spiffy enterprise resource software, many companies can close their books at the moment the quarter ends! That means that the first earnings reports for an earnings season typically begin the second week after the close of the quarter. That means that next week will be the big kickoff. “Yeah, so what” you might say. This earnings season will be particularly important. Why?

One of the reasons I have been reluctant to call another “market bottom,” like I did last fall, is that I want to get a firm handle on how businesses across the board are doing. Do you remember that I said that the First Quarter numbers would be critical? But I am not the only one. Many investors have been trying to get a handle on the scope and gravity of the current recession. What’s more, everyone is anxious for it to end. A sneak peek into answering both questions will be provided by the various company reports that come rolling in. In particular, investors are going to be focused on the following types of companies’ reports:

• Financial institutions – investors will be laser focused to see if banks and other financial institutions have turned the corner and are starting to make money again. They will also be hyper-scrutinizing to see whether or not bank balance sheets have stabilized, or are improving. Lastly, investors will be obsessed to see if there are signs that the liquidity situation is getting better. Many of the financial institutions report very early in the quarter and the reports from these businesses will likely dictate the mood of the financial markets as well as their direction (up or down).

My own belief is that things have stabilized – so I am more concerned to see if there is some growth.

• Consumer spending sensitive industries – these are businesses such as retailers and restaurants. Folks, myself included, will want to see just what the U.S. consumer has been doing during the recession. Are people across the board hunkering down? Or is there some sign that folks are going to be spending again? If spending is down more than expected then we can expect a big ole market meltdown. The reason is that consumer spending is behavior and habit driven – and these will be difficult to turn around.

I expect that restaurant numbers are going to be way down. Almost everyone I know is finding a way to stay at home and eat and my local grocery stores are jammin‘. Retail sales will be bad. I am not much of a shopper so it is hard for me to say much more beyond that.

• Auto makers – after a house, the next biggest thing that most people purchase in their lives are automobiles. The auto business is tied to both of our themes here: debt financing and consumer spending. Thus, the auto makers are frequently a great litmus test for the mood of the consumer. If folks are feeling comfortable then they are willing to take on a new debt payment into their monthly budgets. If they are uncomfortable, then they will not buy a new car. Another reason to watch the car makers is that they either directly or indirectly employ millions of workers across the U.S. Thus, the auto companies results are an insight into manufacturing job strength. So market participants will be really paying attention to the results of the car biz.

I am fairly certain that these results will be bad, but stabilizing. The fact is, even with high unemployment, most Americans are alright even if they don’t feel like it. What that means is that people will begin buying cars again.

• Technology firms – because consumers love technological gadgets, how the tech industry does is often an insight into consumer behavior. More importantly though, technology is one of the principal drivers of economic growth in the U.S. So however the tech industry goes, so goes the future of the economy. The tech firms are also an engine into productivity. Because of the obvious importance of this industry eyeballs will be very focused on these businesses.

My thought is that the technology businesses will likely report better than expected numbers.

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Things of note:

• I expect financial market levels to be very topsy–turvy and hyper sensitive to any good news, and especially to any bad news.
• There have been very few pre-announcements of earnings. These pre-announcements usually occur when businesses have bad news as they try and manage the expectations of investors. The fact that there have been very few of these types of announcements likely means that most businesses are probably on target or better than on target.
• Pay very close attention to businesses that are doing very well in this environment. The measure of a great, well-managed business is how well they do when every other company is sucking air. These would be good candidates for your scrutiny. If you are considering buying then make sure you pay the right price – see my extensive posting on P/E ratios from last fall for a good guide into how to do this.

We should know by the end of April the timing of an emergence from the recession. If nothing else, there will be that knowing.

Respect for all of you!

Jason