Homes for the Holidays - Earnings Preview

Earnings Preview 12/17/10

The third quarter earnings season is over, and we will actually start to see a handful of fourth quarter reports this week, those with November fiscal ends. Next week only 32 firms will report, but 12 of those will be S&P 500 firms. We define any fiscal period ending in November, December and January to be the fourth quarter.

While there are a not a lot of reports, the reports we get will provide some early clues on the fourth quarter. The firms reporting this week include Adobe (ADBE), CarMax (KMX), Carnival Cruise (CCL), ConAgra (CAG), Nike (NKE) and Walgreen's (WAG). That is an interesting cross-section of the market that may provide clues to the overall direction of the economy.

While things will be quite on the earnings side, the same is not true of the economic data front, although all the action will be jammed into two days. Housing will take center stage as we get both Existing and New Home Sales. We also get data on Personal Income and Spending, Durable Goods Orders and Consumer Sentiment. Additionally, we get the final look at GDP growth in the third quarter.

Monday

• Nothing of significance.

Tuesday

• Nothing of significance.

Wednesday

• GDP growth in the third quarter is expected to be revised up from 2.5% to 2.6%. Given the revisions we have seen to August and September data, I agree with the direction, but would not be surprised if the upward revision is a bit more than that, I have 2.7% penciled in. That is roughly equal to the long-term trend in GDP growth, but does not do a lot to get the economy back up to its potential output.
• Existing Home sales are expected to rise to an annual rate of 4.68 million from the October rate of 4.43 million. While I think that the number will rise, I doubt that the increase will be that big, probably only about half that to a rate of between 4.55 and 4.60 million. Of more significance than the absolute level of sales though will be the relationship between sales and the levels of inventories. In October there were enough homes on the market to last for 10.5 months at the October sales pace. That is a very high level, on par with what we saw during the worst of the housing price decline in 2008. The high levels of inventories relative to sales will put downward pressure on housing prices. While the level of existing home turnover is not really that economically significant, the level and direction of existing home prices is extremely important.

Thursday

• Personal Income is expected to rise by 0.2% in November, a sharp slowdown from the 0.5% growth in October. This is a broad measure of income, not just wages but also dividends and interest, rental receipts and even government transfer payments. In recent months, far too much of the income growth we have seen has come from government transfers and not enough from the growth of wages and salaries. Look at the composition of the income growth, not just the level. Personal Spending (also known as Personal Consumption Expenditures or PCE) are expected to have grown 0.4% in November the same pace as in October. Given the strength in retail sales I would not be surprised to see PCE growth a bit higher than that. Of course if PCE is growing faster than Personal Income, it means that the savings rate is falling. In the short term that is a good thing, but in the long term it is a very big problem.
• Initial Claims for unemployment insurance have finally broken out of the trading range they were in for most of 2010, and have done so to the downside (that's good). Last week they fell to 420,000 a drop of 3,000. We probably need to see them fall below 400,000 to signal the economy is adding enough jobs to finally bring down the unemployment rate. We are getting closer, but are not there yet.
• Continuing claims have also in a downtrend of late, but the path has been erratic. Last week they rose by 22,000 to 4.135 million. That is down 1.185 million from a year ago. Some of the longer term decline due to people simply exhausting their regular state benefits which run out after 26 weeks, but even extended claims have started to decline (erratically) as well. Federally paid extended claims rose by 325,000 to 4.831 million, and up 78,000 from a year ago. Looking at just the regular continuing claims numbers is a serious mistake. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• New Orders for Durable Goods are expected to have fallen by 0.8% in November, but that is not as bad as the 3.3% decline in October. Part of the October decline was due to a fall off in orders for Transportation equipment, most notably civilian aircraft. Those orders are expected to decline again. That is an extremely “lumpy” area for new orders, as just a few Jumbo Jets can swamp order growth or declines for the rest of the economy in any given month. Excluding transportation equipment things should look much stronger, with orders growing by 0.6% after a 2.7% decline in October.
• The University of Michigan Consumer Sentiment index is expected to slip to 73.7 from 74.2 last month. I think that this is a vastly over rated economic indicator, but it can occasionally move markets. While how the consumer feels is theoretically very important, what consumers actually do, and what they say in these surveys are often very different.
• New Home Sales are expected to bounce to an annual rate of 305,000 from 283,000. While a 7.8% increase might look impressive, it is coming off an extremely depressed base.  In fact the lowest six months of New Home Sales on record have been in the last six months, and if the consensus estimate is hit, make that seven of seven. It is hard to overestimate the importance of New Home Sales to the overall economy, especially in the early stages of an economic recovery. The low level of New Home Sales (and hence the low level of homebuilding activity) is the principal reason that this recovery has been so anemic. Every home built generates a huge amount of economic activity that feeds through the entire economy.

Friday

• Last minute Christmas shoppers fill the malls and Santa loads up his sled. Merry Christmas to all, and to all a good night.

Potential Positive or Negative Surprises

Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises.

However, given the small number of firms reporting, we skip this section this week.

Earnings Calendar

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
ADOBE SYSTEMS	ADBE	201011	$0.44	$0.31	7.32	20101220	AMC	$28.52
DARDEN RESTRNT	DRI	201011	$0.54	$0.43	3.9	20101220	AMC	$49.71
DRINKS AMERICAS	DKAM	201010	N/A	N/A	N/A	20101220		$0.01
JABIL CIRCUIT	JBL	201011	$0.48	$0.25	-14.63	20101220	AMC	$17.06
JEFFERIES GP-NW	JEF	201011	$0.31	$0.46	-28.13	20101220	BTO	$26.18
PAYCHEX INC	PAYX	201011	$0.35	$0.35	5.88	20101220	AMC	$30.78
CARMAX GP (CC)	KMX	201011	$0.34	$0.33	20	20101221	BTO	$35.03
CARNIVAL CORP	CCL	201011	$0.32	$0.24	12.24	20101221	BTO	$42.54
CARNIVAL PLC	CUK	201011	$0.34	$0.24	120	20101221	BTO	$43.09
CINTAS CORP	CTAS	201011	$0.38	$0.39	8.11	20101221	AMC	$29.44
COMMERCIAL METL	CMC	201011	$0.00	($0.22)	-22.22	20101221	BTO	$17.36
CONAGRA FOODS	CAG	201011	$0.45	$0.52	-12.82	20101221	BTO	$22.44
CPI CORP	CPY	201010	($0.87)	($0.97)	35.9	20101221	BTO	$30.80
EMCORE CORP	EMKR	201009	N/A	($0.11)	8.33	20101221	AMC	$1.55
FSI INTL	FSII	201011	($0.09)	$0.00	13.33	20101221	AMC	$4.49
HOVNANIAN ENTRP	HOV	201010	($0.69)	($2.99)	32.08	20101221	AMC	$4.08
NIKE INC-B	NKE	201011	$0.87	$0.76	12.87	20101221	AMC	$89.23
PROGRESS SOFTWA	PRGS	201011	$0.61	$0.50	0	20101221	AMC	$42.15
RED HAT INC	RHT	201011	$0.15	$0.13	0	20101221	AMC	$48.19
THE9 LTD-ADR	NCTY	201009	($0.37)	($0.35)	15.38	20101221	AMC	$6.21
TIBCO SOFTWARE	TIBX	201011	$0.24	$0.21	16.67	20101221	AMC	$20.73
AMER GREETINGS	AM	201011	$0.67	$0.75	-14.71	20101222	BTO	$21.98
ARROWHEAD RSRCH	ARWR	201009	($0.03)	($0.06)	80	20101222	AMC	$0.91
BED BATH&BEYOND	BBBY	201011	$0.65	$0.58	11.11	20101222	AMC	$47.77
CHRISTOPHER&BNK	CBK	201011	($0.06)	$0.19	-40	20101222	AMC	$5.65
FINISH LINE-CLA	FINL	201011	$0.05	$0.00	-11.43	20101222	BTO	$18.58
LINDSAY CORP	LNN	201011	$0.49	$0.53	71.43	20101222	BTO	$68.08
MICRON TECH	MU	201011	$0.30	$0.17	-20	20101222	AMC	$8.05
NAVISTAR INTL	NAV	201010	$0.59	$1.99	28.36	20101222		$59.48
WALGREEN CO	WAG	201011	$0.53	$0.49	11.36	20101222	BTO	$37.72
PIEDMONT NAT GA	PNY	201010	($0.09)	($0.06)	-18.18	20101223	BTO	$29.79
SUBAYE INC	SBAY	201009	N/A	$5.28	N/A	20101223	BTO	$6.62

 
ADOBE SYSTEMS (ADBE): Free Stock Analysis Report
 
CONAGRA FOODS (CAG): Free Stock Analysis Report
 
CARNIVAL CORP (CCL): Free Stock Analysis Report
 
CARMAX GP (CC) (KMX): Free Stock Analysis Report
 
NIKE INC-B (NKE): Free Stock Analysis Report
 
WALGREEN CO (WAG): Free Stock Analysis Report
 
Zacks Investment Research