The Zacks Analyst Blog Highlights: Bank of America, Apple, Google, Intel and Kimberly-Clark Corporation

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Jul 26, 2011, 09:30 ET

CHICAGO, July 26, 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: Bank of America (NYSE: BAC), Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) Intel (Nasdaq: INTC) and Kimberly-Clark Corporation (NYSE: KMB).

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Here are highlights from Monday's Analyst Blog:

The Earnings Picture

Second quarter earnings season is well underway now, with 136 or 27.2% of the S&P 500 reports in. We are off to a great start, with a single major exception: Bank of America (NYSE: BAC), which had a $12 billion negative swing in net income from last year, due to its settlement of most of its mortgage problems it bought with Countrywide Financial.

That pulled down the overall growth rate for the S&P 500 to just 3.56%, way off the 15.3% pace those same 136 firms posted in the first quarter. However, it you exclude financial sector, growth is 21.8%, actually up from the 19.1% pace of the first quarter.

The 27.2% reported figure actually understates how far we are along in earnings season. If all the remaining firms were to report exactly in line with expectations, we now have 37.8% of the total earnings in. The Tech sector in particular has had many high profile positive surprises, including Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Intel (Nasdaq: INTC).

Top-line results are also off to a very strong start, with 7.01% year-over-year growth for the 136, actually up from the 6.38% growth they posted in the first quarter. The top-line results are even more impressive if the Financials are excluded, rising to 14.003% from the 13.17% pace of the first quarter.

Top-line surprises have been almost as good as than the bottom-line surprises, with a median surprise of 2.01% and a 3.50 surprise ratio. In the early going, though, the medians and surprise ratios can see very sharp fluctuations, so it is still a bit early to read too much into the results.

Rate of Growth to Slow

For the vast majority (364) still to report, the rate of growth is expected to be well below what we have seen already (excluding the BAC effect), with growth of 12.4%, both in total and ex-Financials. I suspect that the actual growth will be somewhat higher than is now expected. Normally about three times as many firms will report positive surprises as disappointments, and that in turn makes the initial growth projections very conservative.

Revenue growth for the remaining firms is also expected to slow, to 6.47% among those yet to report, down from 9.77% they reported in the first quarter. Excluding the Financials, growth is expected to slow to 9.12% from 9.94% in the first quarter. That is still very respectable, especially considering that GDP probably grew only at 1.5% or so in the second quarter with very low inflation. Much of the strong revenue growth is coming from the commodity-oriented Energy and Materials sectors.

Net Margins Curbing a Bit

Net margins have been one of the keys to earnings growth, but we are starting to see some cracks in that story. The 136 that have reported have net margins of 12.05%, down from 12.46% a year ago. That, however, is due to the Financials, especially BAC. Excluding Financials, next margins have come in at 12.73%, up from 11.92% a year ago.

The higher-margin firms have reported early. The remainder are expected to post net margins of 8.14% up from last year's 7.11%. Excluding Financials, the reported net margins are 8.82%, up from 87.60% last year.

On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.40% in 2009. They hit 8.65% in 2010 and are expected to continue climbing to 9.32% in 2011 and 10.05% 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 7.07% in 2009, but have started a robust recovery and rose to 8.27% in 2010. They are expected to rise to 8.88% in 2011 and 9.22% in 2012.

Looking to Full-Year Results

The expectations for the full year are very healthy, with total net income for 2010 rising to $795.4 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $920.0 billion, or increases of 45.6% and 15.7%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.048 Trillion.

That will also put the "EPS" for the S&P 500 over the $100 "per share" level for the first time at $109.79. That is up from $57.23 for 2009, $83.26 for 2010, and $96.30 for 2011. In an environment where the 10-year T-note is yielding 2.97%, a P/E of 16.14x based on 2010 and 13.95x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 12.24x.

Estimate Revisions Very Active

Estimate revisions activity is soaring (as is seasonally normal). During the seasonal decline in revisions activity, the ratio of increases to cuts also declined sharply, from over 2.0 at the height of the last earnings season, to slightly below 1.0 for both this year and next. Now as activity is ticking up, so are the revisions ratios standing at 1.32 ( up from 0.98 last week) for 2011 and 1.26 (up from 1.00) for 2012.

The fundamental backing for the market continues to be solid. It is important to keep your eyes on the prize. There is lots of news out there, and much of it is more dramatic than earnings results, but rarely does it have more significance for your portfolio.

Earnings are, and are going to remain, the single most important thing for the stock market. Interest rates are an important, but distant second.

Nice House, but...

The way I look at things right now is that we are in a neighborhood where most of the houses look like they could be on an episode of "Cribs" or the old "Lifestyles of the Rich and Famous." Unfortunately, there are no police, fire or sanitation services and the local schools are dangerous hellholes. The individual companies all look great with extremely strong balance sheets and rapidly rising net income. The macro-environment, however, is perilous.

Things at the micro level -- earnings and valuations -- provide plenty of reason to be bullish. This is particularly true when one looks at the prevailing level of interest rates. Currently 94 S&P 500 (18.8%) firms have dividend yields higher than the yield on the 10-year T-note, and more than half (254, or 50.8%) yield more than the five year note.

One thing is absolutely certain: the coupon payment on those notes will never go up, while companies have been raising their dividends at a rapid pace of late. Nearly one quarter of the firms in the S&P 500 have raised their dividend at more than a 10% per year rate over the last five years, and those five years include the worst economic downturn since the 1930's.

The old Fed model suggests that it is the earnings yield, not the dividend yield, that should be in line with the 10-year note. The earnings yield based on 2011 earnings is 7.17% and on 2012 earnings it is 8.17%.

Kimberly-Clark Beats Expectations

Kimberly-Clark Corporation (NYSE: KMB) has reported adjusted earnings of $1.18 per share in the second quarter 2011, exceeding the Zacks Consensus Estimate by 3 cents.

The adjusted earnings in the second quarter of 2011 exclude the adjustment for charges related to the pulp and tissue restructuring of 15 cents per share. The results were benefited from sales growth, cost savings and a lower share count.

However, the adjusted earnings were slightly down from the prior-year earnings on the back of significant input cost inflation and a higher effective tax rate.

Kimberly-Clark posted earnings of $1.03 per share in the reported quarter, including the one-time charges. It was, however, 14.2% lower than the year-ago quarter earnings of $1.20 per share.

For fiscal 2011, Kimberly-Clark has reiterated its earnings guidance to the range of $4.80 to 5.05 per share, which is consistent with the company's previous expectations and includes higher input cost expectations, along with incremental plans to reduce costs, compared to previous assumptions.

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