Monday, October 3, 2011

2012 Earnings Estimate For Financials & Materials

Earnings and guidance are likely to be disappointing during the upcoming reporting season. Real GDP rose only 1.3% (saar) in the US during Q3, with consumer spending edging up just 0.7% (also an annualized rate!). European economic growth might have turned negative during the quarter after stalling close to zero during the first half of the year. The yield curve has flattened in recent weeks. Industrial commodity prices fell 10.8% from the end of June through the end of September. The price of a barrel of Brent is down 8.0% over this period.

Odds are that there will be lots of disappointments in the earnings season ahead, most likely led by the Financials and Materials sectors. Of course, the bad news for the quarter may have been discounted already. However, there could also be lots of cautious guidance about Q4 and 2012. Industry analysts are already trimming some of their earnings estimates for next year, particularly in the Financials sector.

As of the week of September 22, the Financials sector’s 2012 earnings has fallen 9.8% since the start of 2011, led by a 23.0% drop for Investment Banking & Brokerage (ETFC, GS, MS, SCHW) and a 17.2% drop for Other Diversified Financial Services (BAC, C, JPM). These earnings estimates have been mostly falling since the beginning of the year, but have been doing so at a faster clip recently.

The sector that is most likely to provide lots of negative earnings surprises is the S&P 500 Materials sector, where 2012 earnings have risen 10.6% since the start of 2011, led by a 17.5% increase in Diversified Metals & Mining (FCX, TIE). That’s a stretch given the recent plunge in the price of copper. Steel (AKS, ATI, CLF, NUE, X) has risen 14.0%, though Aluminum (AA) has edged down by 0.7%. The forecasts for Diversified Chemicals (DD, DOW, EMN, FMC, PPG, up 9.9%) and Specialty Chemicals (ECL, IFF, ROH, SIAL, up 1.9%) may be more realistic because the cost of their feedstock is dropping along with the price of oil.

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