Raw Finance

Earnings came in both before the markets opened this morning and after the close this afternoon, and we really need to do our homework in order to discern anything from what was reported.  Before we get into specifics, let’s review what we know.  We know that the economy had begun to slow going into the third quarter.  The steep drop in consumer borrowing in August was enough evidence.  So, financial analysts have been steadily lowering their earnings expectations for the third quarter for a while now, and the equity markets have been busy lowering the stock prices of just about every company simultaneously.  This means that the bar for third quarter results has been set pretty low.  And then, of course, there is the credit crisis.  The question that we, and the market, want answered is what is happening in the economy now and what can we reasonably expect in 2009?  Today many companies reported third-quarter earnings.  I will focus on a few to get a feel for what is happening across different sectors of the economy:

Before the markets opened:

• Johnson&Johnson (JNJ) reported third-quarter profit of $1.17 per share.  This exceeded analysts’ expectations and J&J was rewarded with a 2% gain in its share price today, closing at $64.  Apparently, sales of pain-reliever Tylenol were up – I’ll bet those sales have only increased further since!  The company also noted that it had continued access to debt instruments such as commercial paper, and remained in strong financial condition.  But what about next year?  Well, according to the Wall Street Journal, the company had this to report:

“In the face of recent financial market volatility, we remain confident in our ability to continue investing in the future growth of our business, while maintaining a strong balance sheet and generating strong cash flows,” J&J Chief Financial Officer Dominic Caruso told analysts on a conference call.

While not very specific, this is as positive a statement as anyone made today.

• PepsiCo reported a 9.6% decline in net income for the quarter, and it announced that it was cutting 3,300 jobs from its workforce.  The market promptly dropped Pepsi’s share by 12%.  It closed at $54.50.  High commodities prices and a rising U.S. Dollar (the company deals in many currencies due to worldwide sales) ate into its profit margins.  The company hopes that international sales will increase in 2009.

After the closing bell:

• Supervalu (SVU), the grocery giant that is third-largest food retailer by sales behind WalMart and Kroger reported a 14% percent decline in profit.  High food prices and a slowing economy were the main culprits for the profit drop, but analysts did not solely point the finger at external forces.  On the teleconference following the earnings report, Robert Summers, an analyst with Pali Capital, noted that SVU must do more to communicate their recent efforts to cut prices and increase promotions.  The company also lowered its full-year profit projections to between $2.86 and $2.96.  It’s stock price had closed at $17.42, down 5% on the day.  Using the low end of the profit range, this puts the price-to-earnings ratio at about 6.  The industry average PE for grocers is 13.5.  The market obviously did not gave great expectations for the company’s earnings report.
• CSX Corp. (CSX), rode the commodities boom to a 29 percent increase in third quarter income.  The nation’s third-largest railroad benefitted from shipments of coal, grain, ethanol and metals, despite an overall weakening economy, which has led to reduced shipments of industrial products.  The railroad expects agriculture and metals to continue to bolster its bottom line. “CSX has momentum in our business and confidence in our ability to produce good results, even in periods of economic uncertainty,” said Chairman and Chief Executive Michael Ward. He added that “CSX is well positioned to deliver shareholder value in the near- and long-term.”  The company expects full-year earnings of $3.65 per share.  The stock price closed today at $48.14, which translates to a PE ratio of roughly 13, suggesting that the shares are fairly valued going forward.
• Intel (INTC):  During the day Bob Pisani at CNBC reported on the expectations for Intel.  This is a pertinent portion of his report:

As a trader, is Intel fairly priced? They used to have all sorts of opinions, because they had models. But when Intel moves from $25 to $15 in two months, all anyone can says is, “I don’t know, Bob, I just don’t know.”

Well, Intel reported earnings per share that were 1 cent higher than the lowered expectations.  That should please investors in the short term.  But what about the 2009 forecast?  Here is an excerpt from the conference call, courtesy of CNBC.com:

“As we look to Q4, it is hard to know what impact the financial crisis will have on end customer demand,” Chief Executive Paul Otellini said in a statement. He added that he was confident in his company’s ability to outpace competitors “at a time when business levels are difficult to predict.”

I believe this means that we need to learn to live with uncertainty for the time being.  So far, the overall picture emerging from third-quarter earnings is that those companies with strong balance sheets and solid product lines and services (e.g. Johnson&Johnson and CSX) will provide some stability for investors until the rest of the picture comes into focus somewhere down the line in 2009.  Also, consider protecting your portfolio against overall market and sector weakness.  Please review this prior post for some ideas.