Zacks Earnings Trends Highlights: Alcoa, Intel and J.P. Morgan

CHICAGO, Jan. 19, 2011 /PRNewswire/ -- Zacks Research Equity Strategist, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.

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Off to a Good Start

The Fourth quarter earnings season is now officially underway. Alcoa (NYSE: AA), Intel (Nasdaq: INTC) and JPMorgan (NYSE: JPM) got things rolling last week, and all three of those Dow components posted better-than-expected earnings.  Still, we have had just a handful (31) of S&P 500 firms report, mostly firms with November fiscal period ends, with a high proportion of retailers in the mix. Thus it is not exactly a representative sample yet.

The early reports are encouraging, with total net income for those firms rising 37.5% over a year ago. The early median surprise of 6.56% is also quite strong, although the ratio of positive to negative surprises is about normal at just 3.00.  However, those numbers are always extremely volatile in the early going and it is far to early to draw any real conclusions about the quarter.

Most of the focus should be on the expectations for those who have yet to report. There the expectations are also positive, particularly on the earnings front. Total net income is expected to rise 21.4% over year-ago levels. While that is a slowdown from the year-over-year growth of the third quarter (24.6%) it is well above the growth that was expected for the third quarter just before the third quarter reporting season really got underway (15.5%).

Given that positive earnings surprises almost always outnumber disappointments, one does not need an overly active imagination to envision that growth will be close to 25% again when all is said and done for the quarter. Revenue growth though is expected to slow down significantly to 1.22% from positive growth of 8.27% in the third quarter.

On the other hand, revenue growth among the handful that have reported is very healthy at 8.96%. The financials are a big part of the overall revenue growth slowdown, but not the entire story. Excluding them, revenue growth is expected to slow to 4.55% year over year from 9.15%. Tougher year-over-year comparisons are a bigger part of the story.

Thus, the stellar earnings growth is mostly due to the continued expansion of net margins. Much of the year-over-year margin expansion is due to the Financials, were the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different. However, even if the Financials are excluded, net margins continue to march northward, at least year over year.

For the S&P 500 as a whole, net margins are expected to be 8.73% in the fourth quarter, up from "just" 7.28% a year ago, but down from 8.96% in the third quarter. If the Financials are excluded, margins are expected to rise to 8.20% from 7.95% a year ago but down from 8.75% in the third quarter. Those numbers are for the vast majority that have yet to report.

The reported net margins among the 31 early birds are 5.16%, up from 4.10% a year ago and from 5.04% in the third quarter. Excluding the Financials that have reported, net margins are 3.46%, up from 2.89% a year ago, but down slightly from the 3.50% those firms reported in the third quarter. Low-margin Retailers are over represented in the early non-financial sample.

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Contact: Dirk Van Dijk, CFA

Company: Zacks.com

Phone: 312-265-9211

Email: [email protected]

Visit: www.zacks.com

SOURCE Zacks Investment Research, Inc.