Since the start of the earnings season last week, one of the trends continues to be a reduction in the EPS estimates for the last quarter of 2011. The tone set by the banks had slowed down the bullish start to the year in the indexes. This week has been dominated by how the financial sector reported, mostly mix bag. We also had some of the larger technology stocks such as Google (GOOG), Intel (INTC), International Business Machines (IBM), Microsoft (MSFT), and Advanced Micro Devices (AMD). In addition we will have General Electric (GE), Freeport-McMoran (FCX), and Schlumberger (SLB) this week from the heavier manufacturing and commodity sector.
The reports on Thursday after the close concentrated on the technology sector. GOOG was the big surprise to the downside (stock dropped 9% after hours), after missing both on EPS and revenues for the 4Q. For the most part the miss came from slower international growth and increase expenses as the company hired more people. Important to note is the increase in revenues of 28% when you compare the result to 4Q10. On the flip side IBM slightly beat expectations EPS front after much talked about Accenture’s warnings a month ago. IBM guidance did however include a reminder that the currency impact of a stronger $ will have a negative impact going forward. MSFT and INTC both beat expectations and where rewarded in the after markets with some positive momentum.
For banks, the expectations had been dropping in the last few weeks, especially after last week’s weaker report from JPM, so it has been easier to beat to some degree these expectations (GS beat by 45% on EPS, but was 8% below on revenues). What is important is the comparison of the 4Q11 vs 4Q10 on the revenue front, where you can actually note a drop in revenues in JP Morgan (JPM) (-17%), Citigroup (C) (-6%), Wells Fargo (WFC) (-4%), Goldman Sachs (GS) (-30%), BlackRock (BLK) (-10%), and Morgan Stanley (MS) (-26%); only US Bancorp (USB) (+8%) and Bank of America (BAC) (+11%) had increases year over year.
To me this just illustrates the difficulty these financial institutions are having at earning revenues. As a result we are still getting confusion in analyst commentary on the financials’ business model –and plenty of commentary on the book value of these financials (most are trading below book value). The uncertainty continues to rise from the lack of confidence in the reported book values – remember we still have the European debt situation pending and all the possible ripple effects (write downs).
The good news for US financial book values is the recent announcement of the sale by the federal reserve of a portion of the “Maiden Lane” portfolio of mortgage back securities, which it had taken off the books of AIG and sold to Credit Swiss this week. My point here is that once investors are comfortable with the reported book values, they will start to discount earnings and come to terms with the current valuations of the sector.
Next week we will have our hands full with more stocks in various sectors reporting. Here is a table with companies expected to report during the week, with expected dates, as well as consensus earnings and revenues for the quarter. Once again only one company is expected to post a loss for the quarter, AK Steel (AKS).
*DISCLOSURES: No relevant position
