Earnings Trends Highlights: Alcoa, Inc., Wells Fargo, Citigroup, and American International Group

For Immediate Release

Chicago, IL - April 14, 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

• Alcoa, Inc. (AA) blows the seasonal kickoff
• Big bank improvements for quarter have not yet translated to full-year expectations
• Early first-quarter results not encouraging with total net income down 23.5%
• Full S&P 500 (SPX) total net income expected to be 28.7% lower than last year
• Forecasts had called for a 37.2% decline last week; the difference is that the Financials' decline was cut to 9.0% from -27.2% last week
• Total net income expected to fall 12.2% for all of 2009, after 18.9% fall in 2008
• Estimate cuts still outnumber increases by more than 3:1 for both years
• Bottom up estimate for S&P 500 now $59.58 in 2009 versus $60.39 last week.
• S&P 500 now expected to earn $74.21 in 2010 versus $74.82 last week

Total Net Income Growth

We are off and running on the first-quarter earnings season with the traditional kick-off by Alcoa, Inc. (AA), which incurred a penalty by kicking it out of bounds with a loss of $470 million.

While we are still very early in the season, with just 27 or 5.4% of all firms reporting, the start has been rocky. Total net income is off 23.5% from a year ago versus an 11.4% drop last quarter. Granted this is far from a representative sample, but it does not seem to be a good omen.

The big upward surge we saw in the financials expectations for the quarter backed off a bit, but will probably resume given Thursday's announcement from Wells Fargo (WFC). (Revisions related to the announcement are reflected in the data). Excluding provisions for bad existing loans, the banks should be very profitable given the steep yield curve and the refinance boom. However, provisions are a mighty big exclusion. The shirt in mark-to-market rules though may give banks cover to avoid adequate provisioning. The pass through of the American International Group (AIG) bailout funds will also greatly help on that front as well.

Looking at the total picture of both companies that have reported and expectations for those that have not shows expectations for total net income being down 28.7% from a year ago. That is a big improvement from the 62.0% decline in the fourth-quarter, but is hardly good news.

A very big part of the fourth-quarter decline was drive by exceptionally large losses at a handful of financial firms, most notably Citigroup (C) and AIG. It seems unlikely that AIG will post anything like the loss it saw in the fourth quarter.

For most stocks the year-over-year decline in net income is likely to be steeper in the first quarter than it was in the fourth quarter. Seven of the 10 sectors are expected to post a bigger drop this quarter. The exceptions are Financials, Materials and Consumer Discretionary. All 3 were absolute disasters in the fourth quarter, and for Materials and Discretionary this will be a very ugly quarter, but just slightly better than the fourth quarter.

Looking at full-year projections, total net income is expected to fall 12.2% following an 18.9% decline in 2008. Most sectors are expected to post far worse results for the year than last year, with the cyclical areas expected to be hit the hardest, particularly the commodity sensitive Materials and Energy sectors. Keep in mind though that those firms were printing money early in 2008.

Scorecard and Median EPS Growth Rates

• Early first-quarter results are weak with median EPS down 5.9%
• Surprise ratio at 1.55 with a median surprise 2.9% (27 firms reporting)
• Positive surprises concentrated in the Consumer Discretionary Sector. (In early going surprise ratio and median will be very volatile)
• A 17.2% decline is seen in the first quarter
• Every sector but Health Care and Utilities (unchanged) expected to be down
• Second quarter to be only slightly better, down 9.0%
• Implied second half rebound, full year 2009 expected to be up 6.7%

Only 27 firms have reported their first quarter results. The ratio of positive surprises to disappointments stands at 1.55:1, while in recent years it has regularly been well over 3:1. The median surprise is 2.87%, which is closer to historical norms. These figures will be very volatile in the early going and may change significantly by the time earnings season is over.

The positive surprises have been concentrated in the Discretionary sector, and it is the only sector to show positive year-over-year growth in median EPS. The rest of the sector is not expected to fare as well, with a median EPS decline of 28.6% expected. Then again low expectations make it easier to have a positive surprise.

Excluding that sector disappointments are beating positive surprises by almost 2:1. These are mostly still firms with February fiscal ends, and are not a very representative sample.

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 down to 0.32, from 0.31 last week
• All sectors but Telecom in negative territory
• Consumer Discretionary is getting less negative
• Industrials is the hardest hit with cuts outnumbering increases by more than 20:1
• Ratio of firms with rising to falling mean estimates at 0.33, up from 0.26
• Total number of revisions (4-week total) up to 1,980 from 1,907 last week (3.8%)
• Increases down to 480 from 448 (7.0%), cuts up to 1,500 from 1,459 (2.8%)
• Estimate activity at seasonal low and will climb sharply in coming weeks

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 Telecom sector was the only one with more increases than cuts, but the sample size is so small (16 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. This should make you suspicious of how real the improvement really is. Full-year cuts outnumber increases for the sector by almost 4:1.

The Industrial sector is an absolute mess, with cuts out pacing increases by a margin of over 20:1. Within the sector, Transportation and Capital Goods companies are particularly hard hit.

The Zacks Revisions Ratio: 2010

• Overall picture for 2010 similar to that of 2009
• Revisions ratio up to 0.30 from 0.27
• More than 3 cuts per increase for 6 sectors and more than 5 cuts per increase in 3 sectors
• Telecom and Discretionary the "strongest"; Industrials and Energy the weakest for 2010
• Ratio of rising to falling mean estimates rises to 0.31 from 0.29
• Total number of revisions rises to 1,381 from 1,285 (7.5%)
• Estimate increases rises to 321 from 277 (15.9%), cuts rise to 1,060 from 1,008 (5.2%)
• Industrials, Energy and Materials slammed

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 (15 total revisions) is 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 has the Consumer Staples sector. The Health Care sector has been fading.

As with 2009, the Industrials sector was far and away the weakest, with Financials, Energy and Materials also very weak. However, in recent weeks 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/Es

• P/Es 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 is 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's market cap share far above earnings shares (overvalued?)
• Health Care's market cap share is well below earnings shares (undervalued?)
• 12-month forward S&P P/E of 13.1 equates to earnings yield of 7.73% and is very attractive relative to 10 year T-note yield of 2.85%, but only mediocre relative to 5.63% A rated 10 year corporate.
• T-note rates are rising and more realistic earnings yields of near 6.06% based on lower earnings ($50) means the spread, while still attractive is not overwhelming.

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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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