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Despite the turmoil that is occurring within the credit markets, the outlook for third-quarter profits is rather positive. Brokerage analysts expect companies within the S&P 1500 (S&P 500, S&P MidCap 400 and S&P SmallCap 600) to post median growth of 8.5%. Although this would be a slower pace of growth than a year ago (Q306), it is still indicative of notable increases in corporate profits. If earnings come in above expectations, it is reasonable to expect the median company within the S&P 500 to report double-digit growth.
There are a few reasons why profits are continuing to rise. Many companies have been able to leverage higher raw material costs into higher prices. Corporations are continuing to invest in software and equipment. The consumer, despite the rise in foreclosures, is continuing to spend. (Just yesterday, Best Buy (BBY) said that demand for high definition TVs remains strong.) The weak dollar both makes exports more competitive and increases the value of profits earned abroad. Share repurchases are increasing the relative proportion of profits per share. And, most importantly, the economy is still expanding.
At the industry level, there are relatively few surprises as to the type of company that is likely to report strong growth and the type that is likely to report weak growth.
On the positive side, Aerospace appears set for another round of good reports. Air traffic has been on the rise worldwide, airlines are investing in their fleets and demand for parts remains healthy. Boeing (BA) has been a beneficiary of these trends with a lengthy backlog for its new Dreamliner jet last years, even though the aircraft has yet to go on its inaugural flight. On the replacement parts side of the industry, Precision Castparts ( PCP - Analyst Report ) is projected to generate a 60% increase when it reports this fall. BA and PCP are both Zacks #2 Rank ("buy") stocks.
Beverage makers appear likely to generate median double-digit growth. Demand for bottled water and flavored beverages are helping to offset the traditional dependence on soda. Price increases have also helped. Pepsi Bottling Group (PBG), which topped second-quarter expectations by seven cents, is expected to report am 11% rise in third-quarter earnings. PBG is a Zacks #2 Rank stock.
Those food companies able to pass along higher commodity prices should also fare well. Corn Products International (CPO) reaffirmed its full-year guidance last month. Heinz ( HNZ - Analyst Report ) raised its full-year guidance last month, citing good sales performance of its beans, soups, Smart Ones diet frozen meals and its Classico sauces. The company also realized a 13% increase in ketchup sales during its fiscal first-quarter. CPO is a Zacks #1 Rank ("strong buy") stock and HNZ is a Zacks #2 Rank stock.
Staying with the agriculture theme for a moment, Deere & Co ( DE - Analyst Report ) is projected to report 27% profit growth this quarter. Those who regularly read this column will know that the push for increased use of ethanol and worldwide economic growth has created a booming agricultural economy. Prices of several food-related commodities have recently hit new highs. DE is a Zacks #1 Rank stock.
Tech giants Hewlett-Packard ( HPQ - Analyst Report ) and Cisco Systems ( CSCO - Analyst Report ) both pleasantly surprised their shareholders last quarter and are expected to achieve another good quarter. Strong sales of laptop computers are providing a boost to HPQ. Brokerage analysts believe the company could deliver 19% growth this quarter. Higher corporate spending and ever-growing reliance on networks should enable CSCO to generate 18% growth this quarter. Two analysts have raised their fiscal first-quarter forecasts on the company within the past month. Both HPQ and CSCO are Zacks #2 Rank stocks.
On the flip side, the median projected growth rate for regional banks within the S&P 1500 is 0.0%. As I discussed a couple of weeks ago, profit forecasts for many banks have been cut. Fewer mortgage originations, the ongoing credit crisis and more intense competition for deposits are all headwinds facing many financial institutions. Although yesterday's rate cut was welcome news, it is unlikely to reverse the current trends in the housing market. IndyMac (IMB), First Horizon National (FHN) and Susquehanna ( SUSQ - Snapshot Report ) are among those projected to post the largest drops in year-over-year earnings. IMB is a Zacks #3 Rank ("hold") stock, SUSQ is a Zacks #4 Rank ("sell") stocks and FHN is a Zacks #5 Rank ("strong sell") stock.
The third-quarter outlook for the mega banks is only slightly more positive. The median growth rate for Bank of America (BAC), Citigroup ( C - Analyst Report ) , J.P. Morgan Chase ( JPM - Analyst Report ) , Wachovia (WB) and Wells Fargo ( WFC - Analyst Report ) is just 4.7%. WB is a Zacks #4 Rank stock, the other banks are Zacks #3 Rank stocks.
Eight homebuilders within the S&P 1500 have a Zacks Rank of 5. The median projected growth rate for these eight homebuilders is -138%. Despite yesterday's rally, the outlook for homebuilders is not positive.
The problems with the housing market are well known, but what isn't discussed as much are the headwinds facing semiconductor companies. Although demand for electronics remains very healthy, chip prices are still under pressure. The lack of pricing power hurt chip companies in the second-quarter and is remaining an issue in the third quarter. This is why the median semiconductor company is expected to report no change in profits from a year ago. Three companies, Advanced Micro Devices (AMD), Adaptec (ADPT) and Micron Technology ( MU - Snapshot Report ) are likely to report triple-digit percentage declines in earnings. These three chipmakers are Zacks #3 Rank stocks.
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.
|Sector Rank as of Sep 19|
|Sector|| This Week's |
| Last Week's |
| Net % of FY07 |
| Estimates |
|Computer and Technology||2.98||2.98||0.00%||384||291|
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