Earnings Trends Highlights: J.P. Morgan, Wells Fargo, American International Group, Citigroup

For Immediate Release

Chicago, IL - April 7, 2009 - Zacks Research Director, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.

Key Points from Van Dijk's Latest Earnings Assessment

• Massive UPWARD revisions to 1Q expectations for Financials
• Mostly due to major banks, but gains don't translate to similar gains for full year
• Very early first-quarter results not encouraging, total net income of 21 firms down 11.9%
• Full S&P 500 (SPX) total net income expected to be 27.5% lower than last year
• Was a 37.2% decline last week, Financials decline cut to 9.0% from -27.2% last week
• Total net income expected to fall 10.8% for all of 2009, after 19.0% fall in 2008
• P/E's based on 2009 estimates will prove to be to low as "E" plunges
• Estimate cuts still out number increases by more than 3:1 for both years
• Financials expected to rebound after disastrous 2008
• Bottom-up estimate for S&P 500 now $60.39 in 2009
• S&P 500 now expected to earn $74.82 in 2010.

Total Net Income Growth

The big news this week is the massive upward revision in the first-quarter earnings expectations for the Financials. In total, the sector is expected to earn than $3 billion more this week in the first quarter than forecasts predicted a week ago. Most of the increase is attributable to the mega banks like J.P. Morgan (JPM), Wells Fargo (WFC) and Citigroup (C).

Changes in the mark to market rules (well the anticipation of the changes, the actual change is to recent to be captured by these numbers) is likely the biggest reason. If so, then it is mostly a change in the accounting earnings, not the economic earnings.

The other explanation is that passing through of American International Group, Inc. (AIG) bailout money to these large banks by settling their CDS exposures in full. That gift from the taxpayers would be a real economic benefit bank bottom lines.

While the sector as a whole is still expected to earn less than it did a year ago, the magnitude of the decline has been cut dramatically, to just a 9.0% drop from an expected 27.2% decline just last week. This has caused the expected decline in the total earnings for the S&P 500 as a whole to also moderate significantly, with a 27.5% drop expected now vs. a 37.2% decline forecast just last week.

We just have a relative handful of actual earnings reports in for the first quarter, all of them firms with February fiscal period ends. As such it is far from a representative sample. However, the 21 firms that have collectively earned a total of $5.1 billion, a 11.9% drop from the $5.8 billion they earned in the first quarter of 2008. Quite surprisingly the Consumer Durables sector is doing very well, posting a 22.2% increase in total net income so far. Every other sector has total net income below last year, but the sample size is far too small to draw any real conclusions.

For the full year, earnings estimates continue to be cut for both 2009 and 2010. The negative revisions continue to out pace increases by more than a 3:1 ratio for both years, but that is better than what we were seeing a few months ago when the margin was more like 5:1. On the other hand, the improvement is happening on a very light volume of total estimate revisions (seasonally normal), so the improvement has as much to do with old cuts falling off the four week running totals as it does with new increases being made.

Scorecard and Median EPS Growth Rates

• Early first quarter are results weak with median EPS down 5.8%
• Surprise ratio at 2.0, median surprise 9.7% with 21 firms reporting
• A 15.8% decline is seen in the first quarter
• Nearly every sector but Health Care expected to be down (Utilities are unchanged)
• Second-quarter profits will be only slightly better, down 9.4%
• Implied second-half rebound; full year 2009 expected to be up 6.6%

Only a handful of firms have reported their first quarter results. These are all companies with fiscal periods ending in February, and are hardly a representative sample.

The results over the last week have been better than expected and the surprise ratio has jumped to 2:1 from an even 1:1 last week. The Consumer Discretionary sector has a perfect record so far with 8 results in and 8 positive surprises. Those firms have generated median EPS growth of 15.8%, and a median surprise of 18.9%. The remaining firms in the sector are not expected to fare as well, with a median EPS of 27.3% expected. But then again, that is what makes for surprises.

Health Care is the only sector currently expected to post better year-over-year EPS than a year ago, The Utilities are expected to be flat and Consumer Staples is only expected to see a negligible decline. Beyond that the expectations start getting very ugly, with 6 of the sectors expected to post median drops of over 20%.

Materials and Energy are expected to see drops of over 40%. Those two sectors however are facing very difficult comps. Remember just how much the oil companies were making last year, well other commodities were also doing very well then as well.

Looking ahead to the second quarter, there should be significant improvement, with every sector by energy expected to show either a bigger increase, or a smaller decline than in the first quarter.

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 down to 0.31, from 0.29 last week
• All sectors but Telecom in negative territory
• Consumer Discretionary getting less negative
• 7 sectors have at least 2 cuts for every increase, 5 have at least 4 cuts per increase
• Ratio of firms with rising to falling mean estimates at 0.26, up from 0.25
• Total number of revisions (4 week total) down to 1,907 from 2,060 last week (-7.4%)
• Increases down to 448 from 465 (-3.7%), cuts down to 1,459 from 1,595 (-8.5%)
• Estimate activity nearing seasonal low

The revisions ratio reversed a gradual uptrend it had been in for several weeks, and remains in very negative territory. Generally we consider anything below 0.80 to be negative, and anything above 1.25 to be positive. Only health Care has made into neutral territory. The overall pace of estimate revisions is slowing dramatically, as it usually does after earnings season is over. The revisions ratio is based on the four week moving totals of estimate changes. Thus the rise in the ratio may have more to do with old estimate cuts falling off faster than old estimate increases than it does with new estimate revisions.

The Telecom sector was the only one with more increases than cuts, but the sample size is so small (19 total) that it really is not that significant. The Consumer Discretionary sector has improved significantly, most likely in response to the better than expected earnings for the early reporters in the sector. The dramatic improvement in the total net income expectations for the Financial sector in the first quarter has not been matched to a flood of estimate increases for the full year, which should make you suspicious of how real the improvement really is. The Industrial sector is an absolute mess, with cuts out pacing increases by a margin of over 40:1.

The Zacks Revisions Ratio: 2010

• Overall picture for 2010 similar to that of 2009
• Revisions ratio steady at 0.27
• More than 3 cuts per increase for 6 sectors, more than 5 per increase in 4 sectors
• Telecom, Discretionary the "strongest", Industrials, Energy weakest for 2010
• Ratio of rising to falling mean estimates rises to 0.29 from 0.28
• Total number of revisions falls to 1,285 from 1,326 (-3.1%)
• Estimate increases fall to 277 from 283 (-2.1%), cuts fall to 1,008 from 1043 (-3.4%)

The 2010 revisions ratio story is pretty much the same as 2009. A gradual pattern of a low but improving revisions ratio was slightly reversed this week. In a bit of a surprise, the total number of revisions actually grew this week, counter the normal seasonal pattern.

The very small Telecom sector (23 total revisions) and Health Care the best on a relative basis, but nothing to really write home about. The Consumer Discretionary sector has also improved significantly in recent weeks. As with 2009, the Industrials sector was far and away the weakest, with Financials, Energy and Materials also very weak. However, in recent days the price of oil has started to rebound. If that holds, it seems likely that the estimates could start to head up again for the Energy sector. As it stands now, the size of the cuts in the sector is very large.

Earnings Shares and P/E's

• P/E's are too low since earnings estimates are too high
• Earnings Shares, including historical, based on current make up of S&P 500
• Health Care expected to take Earnings crown from Energy in 2009, keep it in 2010
• Energy's earnings share expected to plunge to 12.8% from 23.8%
• Financials' 2009 earnings share expected to rise to 12.1% from -2.1% in 2008.
• Consumer Discretionary market cap share far above earnings shares (overvalued?)
• Health Care Market Cap share well below earnings shares (undervalued?)
• The 12-month forward S&P 500 P/E of 13.1 equates to earnings yield of 7.63%. This is very attractive relative to 10 year T-note yield of 2.63%, but only mediocre relative to 5.68% A rated 10-year corporate.
• T-note rates are rising and the more realistic earnings yields of near 6.15%, based on lower earnings ($50), means the spread, while still attractive, is not overwhelming.

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 4/1/2009

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Contact: Dirk Van Dijk, CFA
Company: Zacks.com
Phone: 312-265-9211
Email: pr@zacks.com
Visit: www.Zacks.com

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