Q1 Earnings: Winners and Losers

First-quarter profits are going to stink. The consensus projections call for S&P 500 (SPX) profits of $16.33, which equates to a decrease of approximately 14% from a year prior.

On a company-specific basis, the numbers could be worse. Median earnings are likely to decline 19.3%. More than 10% of S&P 500 members are expected to report triple-digit drops in profits (57 companies with declines of 100% or more). Conversely, just 8 companies will please shareholders with increases of 100% or more.

Overall, 364 companies are forecast to report a year-over-year decrease in earnings. The actual number will be somewhat less given the probability of positive surprises, but first-quarter profits will clearly reflect the ongoing recession.

Behind the headline numbers will be a mixed bag of reports, with some winners and some losers.

Potential Winners

The biggest winners could be oil refiners Sunoco, Inc. (SUN - Analyst Report), Tesoro Corporation (TSO - Analyst Report) and Valero Energy Corporation (VLO - Analyst Report). SUN and TSO could see profit gains of 219% and 160%, respectively, while VLO could report a 41% increase in earnings.

The drop in oil prices and improvement in margins are helping these companies. Refiners are dependant on the crack spread (the difference between what they pay for oil and how much they sell gasoline and heating oil). An upward, albeit volatile, improvement in the crack spread - combined with cost-cutting measures - has helped profits and offset the impact of lower demand.

SUN, TSO and VLO are Zacks #2 Rank ("buy") stocks and are classified in Oil Refining & Marketing.

Medical Profits Growing, As Expected

Investors preferring a group not dependent on commodity prices may want to look at medical care companies. Several of these companies should report double-digit growth, including Stericycle Inc. (SRCL - Analyst Report) and Medco Health Solutions Inc. (MHS).

The advantage of medical companies is that they are less economically sensitive. Therefore, while their rate of growth won't wow anybody, these companies are capable of delivering good numbers even in the midst of a recession.

Stericycle handles medical waste. The company gave a bullish outlook for 2009 last month and the consensus earnings estimate has been rising. Though SRCL has a pricey valuation, it also has a history of topping estimates. The consensus estimate calls for the company to earn 47 cents this quarter, an increase of about 20% from last year.

MHS reaffirmed its full-year 2009 guidance last month. The pharmacy benefits manager is seeing strength in its specialty pharmacy business as well as its mail-order prescription business.

Though first-quarter estimates have been trimmed over the past 30 days, down 2 cents, brokerage analysts are still calling for growth. The consensus earnings estimate of 62 cents represents growth of 13%. Medco has topped expectations for 11 consecutive quarters.

SRCL is a Zacks #2 Rank stock and is classified in Medical-Hospitals. MHS is a Zacks #3 Rank ("hold") stock is and classified in Medical-HMO.

Homebuilders Should Report Smaller Losses

Several homebuilders will face easier comps, resulting in impressive year-over-year gains. For example, D.R. Horton, Inc. (DHI - Analyst Report), Centex Corporation (CTX) and KB Home (KBH - Analyst Report) are all projected to report losses that are at least 75% smaller.

The housing slump is not over, however, especially given that unemployment continues to rise and credit remains tight. Furthermore, homebuilder profit forecasts for fiscal 2010 are also falling. Therefore, while the year-over-year comps might look good, business conditions will remain tough.

DHI is a Zacks #2 Rank stock and CTX and KBH are Zacks #3 Rank stocks. All 3 are classified in Building-Residential/Commercial.

(Fiscal 2009 forecasts for DHI have improved over the past 60 days, though are down over the last 30 days. The good Zacks Rank is a reflection that the change in the outlook for DHI is relatively better than for most other companies. In other words, estimates for DHI already reflect more bad news.)

Potential Losers

It is going to be another difficult quarter for the semiconductor industry. The worldwide economic contraction has hurt demand at a time when the industry was already dealing with downward pricing pressures and excessive inventory.

Not a single chip company within the S&P 500 is forecast to experience growth in the first quarter.

National Semiconductor Corporation (NSM) provided a good example of the industry's woes when it reported last week. Adjusted earnings totaled 4 cents per share, a decrease of 86% from a year prior. Sales fell 36% and gross margins worsened. Furthermore, NSM anticipates a sequential drop of 5% to 10% in sales this quarter.

LSI Corporation (LSI - Analyst Report), Broadcom Corporation (BRCM - Analyst Report), SanDisk Corporation (SNDK - Analyst Report) and Texas Instruments Inc. (TXN - Analyst Report) could all report triple-digit declines in profits. Even Intel Corporation (INTC - Analyst Report) is expected to suffer with profits falling to just 3 cents per share, from 29 cents a year prior.

NSM is a Zacks #2 Rank stock. BRCM, INTC, SNDK, TXN are Zacks #3 Rank stocks. LSI is a Zacks #4 Rank ("sell") stock. All of these companies are classified in Electronic Computer-Semiconductor

Steel Producers Are Melting

The bursting of the commodity bubble will have a dramatic effect on the numbers reported by steel companies. For example, U.S. Steel Corporation (X - Analyst Report) is projected to report a loss of $1.39 per share, versus a profit of $2.36. AK Steel Holding Corporation (AKS - Analyst Report) should lose 44 cents after earning 90 cents a year prior.

These companies fared well when commodity prices were soaring. Strong demand and speculative trading allowed steel producers to enjoy pricing power. Now, the worldwide economic slump has hurt demand. Though the stimulus package could eventually revive demand, it has yet to have any effect.

AKS and X are Zacks #3 Rank stocks and are classified in Steel-Producers/

Bank Earnings

I'll finish with a quick note about banks. The numbers will be horrible. Although several firms recently made comments about being profitable in the first-quarter, few details were given and the assessments likely did not reflect the large write downs that are still being taken.

As I said last week, you should be aware that financial stocks are trading mostly on sentiment and news flow, not actual fundamental data or technical analysis.

The Zacks Rank is a short-term quantitative indicator that factors revisions toearnings estimates and earnings surprises.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Read the full analyst report on X

Read the full analyst report on INTC

Read the full analyst report on SRCL

Read the full analyst report on TSO