Oil Companies' Profit Expections Continuing to Rise

Oil prices have been gushing. Yesterday, the price of Texas Tea broke the $75 mark. (Crude closed at $74.02.) The recent increase in the price of crude seems to be more driven by fears that supplies won’t keep up with future demands than any current issues. A Gulf Coast hurricane premium appears to be priced in by some traders. Also contributing are the usual suspects: refinery issues, geopolitical problems, worldwide economic growth, etc…

All of this bodes well for ExxonMobil (XOM - Analyst Report). The energy conglomerate’s market cap exceeded $500 billion last week and totaled $501.9 billion as of yesterday’s close. The price appreciation coincides with rising earnings estimates. Just within the past two weeks, one-quarter of the covering brokerage analysts raised their second-quarter earnings forecasts. XOM is now projected to have earned $1.90 per share versus $1.79 two weeks ago. To put these numbers in perspective, two months ago, the consensus estimate stood at $1.71. Investors should note that full-year earnings estimates for both 2007 and 2008 are also up considerably. XOM is scheduled to report on Jul 26, before the start of trading.

ExxonMobil is not the only oil company that brokerage analysts are becoming even more optimistic about. During the past 30 days, about half of the covering analysts have raised their second-quarter earnings forecasts on oil refiner Sunoco (SUN - Analyst Report). The consensus estimate now calls for the company to have earned $3.69 per share, a 17-cent increase. Higher crude prices allow refiners to enjoy wider profit margins, which in turn results in bigger profits. Refiners are operating near full capacity and this provides them with even more pricing power. SUN is scheduled to report on Aug 1, after the close of trading.

XOM is a Zacks #1 Rank (“strong buy”) stock is classified in Oil & Gas International Integrated. This group contains two other Zacks #1 Rank stocks, China Petroleum (SNP - Analyst Report) and PetroChina (PTR - Analyst Report), as well as two Zacks #2 Rank (“buy”) stocks. SUN is a Zacks #2 Rank stock and is classified in Oil Refining & Marketing. This group contains six other Zacks #1 Rank stocks, Energy Transfer Equity (ETE - Snapshot Report), Frontier Oil (FTO - Snapshot Report), Genesis Energy (GEL - Snapshot Report), Holly Corporation (HOC - Snapshot Report), Syntroleum (SYNM - Snapshot Report) and Western Refining (WNR - Snapshot Report). The group also contains eight other Zacks #2 Rank stocks in addition to SUN.

Last week, I discussed the optimism about earnings among companies within Beverages-Soft Drinks. Specifically, I mentioned the bullish second-quarter earnings report from Pepsi Bottling Group (PBG - Analyst Report) and the raised earnings expectations for some of the Coca-Cola bottlers, including Coca-Cola Enterprises (CCE - Analyst Report).

Since PBG’s positive surprise, the company exceeded estimates by seven cents with profits of 70 cents per share, nearly all of the covering brokerage analysts have increased their full-year profit projections. The new consensus estimate of $2.06 per share is eight cents above the forecast of a week ago, and near the high end of the raised guidance provided by PBG. (The bottler predicted profits would be in range of $2.02 to $2.07 per share.)

Now onto CCE. Yesterday, Coca-Cola (KO - Analyst Report) reported adjusted second-quarter profits of 85 cents per share, three cents above the consensus estimate. Unit case volume rose 6%, reflecting strength overseas and strong sales of Dasani and Powerade. North American case volume did decline, but European case volume rose by 5%. Pricing power helped to drive net revenues higher for both geographic segments. PBG also stated last week that it was able to pass along higher costs to consumers.

What does this mean for CCE? Judging from KO and PBG’s report it seems likely that CCE passed along higher costs (including corn syrup) to consumers. Case volume levels in the U.S. are not likely to be impressive, but overall earnings should still come ahead of expectations. Four brokerage analysts raised their second-quarter forecasts within the past 30 days, including one last week, and the consensus estimate calls for profits of 55 cents per share. Coca-Cola Enterprises is scheduled to report on Jul 26, before the start of trading.

Two companies with direct exposure to home lawn and gardening warned last week. Drier than normal conditions had a direct, adverse impact on Spectrum Brands (SPC) and ScottsMiracle-Gro (SMG - Snapshot Report). It is very possible that the weak housing market is also playing a role.

SPC lowered its fiscal 2007 revenue and EBITDA forecasts to $2.634 billion and range of $260 and $264 million. (The company had previously forecast revenues to total $2.648 billion and EBITDA to total $282 million. Investors should note that SPC also cited weakness in battery sales as having an adverse impact.) Half of the covering analysts have since cut their full-year forecasts, causing the consensus estimate to fall by six cents to a loss of two cents per share. SPC has missed expectations during three out of the past four quarters.

SMG blamed the weather for a 19% decrease in sales during April. As result, the company anticipates that fiscal 2007 earnings will be in a range of $2.35 to $2.45 per share instead of being flat with fiscal 2006’s profits of $2.62 per share, as was previously forecast. All of the covering analysts have cut their projections, sending the consensus estimate down 22 cents to $2.40 per share.

Both SMG and SPC are Zacks #5 Rank (“strong sell”) stocks. The two companies are classified in Consumer Products-Miscellaneous Staples.

Zacks Premium and ZacksElite 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 a senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com

*A small portion of the estimates reflect FY08 earnings estimates for companies whose fiscal years end at a month other than December 2007 or January 2008.