CHICAGO, April 12, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Alcoa (NYSE: AA), Google (Nasdaq: GOOG), J.P. Morgan (NYSE: JPM), Bank of America (NYSE: BAC) and Fastenal (Nasdaq: FAST).
The fourth quarter earnings season is over, and now the focus turns to the first quarter. While it "officially" kicks off after the bell today when Alcoa (NYSE: AA) reports, we already have 26 (5.2%) first quarter reports in from the S&P 500.
Alcoa, though, like the Master's -- is but the first of the majors. It will not be the only one in the early going. We will also hear from Google (Nasdaq: GOOG), J.P. Morgan (NYSE: JPM) and Bank of America (NYSE: BAC) this week. Together, they should provide some good clues to the overall direction of earnings season.
One firm which is not a household name but we be good to keep an eye on is Fastenal (Nasdaq: FAST). It is the number one maker of fasteners -- things like screws and bolts -- which go into all sorts of other things. If it reports strong results, it is a good bet that the rest of the market will, as well.
Good Start, but Earnings Growth to Slow
While far too early to draw any conclusions, it looks like we are off to a good start on the first quarter, with reported net income growth of 22.7%, down just slightly from the 25.7% growth those same 26 firms reported in the fourth quarter. That, however, is not expected to last. The consensus is looking for a dramatic slowdown in growth for the remaining firms, with total net income rising just 7.71%.
Financial firms setting aside much less than a year ago for bad debts were a big part of the earnings story for the fourth quarter, and a big part of the deceleration in year-over-year growth has to do with a much higher base, particularly in the Financials in the first quarter of 2010 than in the fourth quarter of 2009. If the Financial sector is excluded, total net income rose 19.8% from a year ago, in the fourth quarter, and in the first quarter it is expected to slow to 9.3%.
Positive Surprises Expected?
Given the trend of positive earnings surprises, I would be shocked if the actual growth rate is that low. It is almost certain to be in the double digits again. Revenue growth in the fourth quarter was healthy at 8.28%. Looking ahead to the first quarter, though, those firms yet to report are expected to post year-over-year revenue growth of just 4.14%.
Financials are the key reason for the slowdown in revenue growth; if they are excluded, reported revenue growth is expected to be 9.08%. Tougher year-over-year comparisons are a big part of the story.
Net Margins to Expand Slightly
Net margin expansion has been a driver of earnings growth, but that expansion is slowing down, particularly if one excludes the Financials. Overall, net margins are expected to come in at 9.03% in the first quarter, up from 8.73% a year ago, and from 8.92% in the fourth quarter. However, excluding the Financials, net margins are expected to only creep up to 8.29% from 8.27% a year ago, and down from 8.81% in the fourth quarter.
Among the handful of S&P 500 companies that have already reported for the first quarter, overall net margins are 7.92%, up sharply from 7.06% a year ago and from 7.06% in the fourth quarter. Strip away the Financials that have already reported and the picture is different, rising to 7.62% from 7.86% a year ago and from the 7.30% reported in the fourth quarter.
Do not make too much of the level of reported net margins being significantly lower than the expected net margins. That is due to the reporting firms being very overweighted towards retailers (many have February fiscal period ends), which tend to be lower-margin businesses.
On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.39% in 2009. They hit 8.59% in 2010 and are expected to continue climbing to 9.59% in 2011 and 10.31% in 2012. The pattern is a bit different, particularly during the recession, if the Financials are excluded, as margins fell from 7.78% in 2008 to 7.09% in 2009, but have started a robust recovery and rose to 8.24% in 2010. They are expected to rise to 8.84% in 2011 and 9.37% in 2012.
Another Good Year Overall?
The expectations for the full year are very healthy, with total net income for 2010 rising to $790.5 billion in 2010, up from $545.1 billion in 2009. In 2011, the total net income for the S&P 500 should be $909.5 billion, or increases of 45.3% and 15.1%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to 1.036 Trillion.
That will also put the "EPS" for the S&P 500 over the $100 "per share" level for the first time at $108.50. That is up from $57.13 for 2009, $83.16 for 2010, and $95.67 for 2011. In an environment where the 10-year T-note is yielding 3.54%, a P/E of 16.1 based on 2010 and 14.0x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 12.3x.
With far more estimates being raised than being cut (revisions ratio of 1.32), one has to feel confident that the current expectations for 2011 will be hit, and more likely exceeded. Analysts are raising their 2012 projections at an even higher rate, with a revisions ratio of 1.74. While a lot can happen between now and the time the 2012 earnings are all in, upward estimate momentum means that the current 2012 earnings are more likely to be exceeded than for them to fall short.
This provides a strong fundamental backing for the market to continue to move higher. The fact we are in the third year of the presidential cycle (almost always the best of the four, and by a big margin). We have a Democrat in the White House, which has historically meant good things for the stock market, with an average annualized return over the last 50 years more than triple that when the GOP holds the Oval Office. Few, if any, binomial variables have as much statistical significance. Those factors should combine to make this a good year for the market.
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