Zacks Earnings Trends Highlights: Hershey, Phillip Morris, Supervalu, Safeway, Amgen, Bristol-Myers Squibb, Wyeth, Apple and Texas Instruments

For Immediate Release

Chicago, IL – August 4, 2009 - Zacks Research Equity Strategist, 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

Growth

• Second-quarter total net income expected to be down 28% year-over-year
• Third quarter expected to be down 23.5% year-over-year
• Staples and Health Care only sectors expected to post positive growth in second quarter
• Only 31.5% of reporting companies post earnings growth; 24.0% post sales growth year-over-year

Surprise

• Early results much stronger than expected; the median surprise is 6.7%
• Early positive surprises lead disappointments by 3.9:1 margin
• Surprise ratio above 6:1 for Health Care, Tech, Discretionary and Materials
• Margins the cause, not revenue growth
• 72.7% of firms beat on earnings; 46.3% beat sales estimates

Full-Year Forecast

• Bottom-up estimate for S&P 500 now $60.20 in 2009 versus $60.12 last week.
• S&P 500 now expected to earn $74.42 in 2010 versus $74.41 last week
• Top down estimates $54.19 and $68.48, respectively

Revisions

• Total estimate increases outnumber cuts by almost 4:3 for 2009
• Upward revisions outnumber cuts by almost 7:6 for 2010
• Level of increases small given positive earnings surprises
• For 2009, Staples and Health Care lead; Utilities, Telecom lag
• Tech and Materials also look good for both years

Valuation

• S&P 500 P/E at 16.39x based on 2009 earnings - an earnings yield of 6.1%
• P/E of 13.26x based on 2010 Earnings - an earnings yield of 7.54%
• Earnings yields attractive relative to treasury and corporate bond yields
• Health Care has lowest P/Es of any sector

Total Net Income Growth

• Early results are absolutely bad, but better than expected
• Total net income reported $108.9 billion versus $147.5 billion last year, down 26.2%
• Only 31.5% of all reports show positive year-over-year EPS growth; just 24% show sales growth
• Only Staples and Health Care show positive growth so far
• Remaining firms expected to post 33.4% decline
• Materials and Energy expected to see massive year-over-year declines

Total Net Income Growth

• Early results are absolutely bad, but better than expected
• Total net income reported $108.9 billion versus $147.5 billion last year, down 26.2%
• Only 31.5% of all reports show positive year-over-year EPS growth; just 24% show sales growth
• Only Staples and Health Care show positive growth so far
• Remaining firms expected to post 33.4% decline
• Materials and Energy expected to see massive year-over-year declines

• Revisions ratio for full S&P 500 up to 1.32, from 1.19
• Given the level of positive surprises, the increase in the revisions ratio is very small
• Five sectors are in positive territory; Staples and Health Care lead
• Industrials, Utilities and Telecom continue to see estimates cut
• Ratio of firms with rising-to-falling mean estimates up to 1.26, from 1.02
• Total number of revisions (4-week total) up to 3,467 from 2,560 (35.4%)
• Increases up to 1,972 from 1,389 (42.0%); cuts up to 1,495 from 1,171 (26.8%)
• Total Revisions activity rising rapidly, nearing seasonal peak

So far, this is looking like the story of the dog that didn't bark.

Yes the revisions ratio has edged up, but given the magnitude and number of positive surprises in second-quarter earnings, one would expect a flood of positive estimate revisions. After all the second quarter is part of the full year 2009, so if a company beats the estimates for the quarter, and the analysts do not raise their estimates for the full year by the amount of the beat, then they are implicitly cutting their forecasts for the third and fourth quarters.

There is a very good possibility that this is simply a lag effect in the data, as the pace of reports has really picked up in the last few days. If so, we should see the revisions ratios rise dramatically over the next few weeks. We have seen a dramatic increase in total revisions activity, which is normal for this point in the earnings season, but cuts have increased almost as much as increases have. This is a subtle, but very disturbing sign.

The defensive Staples and Health Care sectors are doing the best on the revision front. However, Materials is about as cyclical a sector as you can think of and it has shown a great improvement in its revisions ratio, apparently in response to the much better-than-expected earnings in the sector. Tech is also having a better than expected earnings season, and in response its revisions ratio is also strong. However, positive surprises are leading disappointments by 9:1 in Materials and by almost 7:1 in Tech. Thus, I find a 2:1 lead over estimate increases for the year that includes those surprises to be a little underwhelming.

Generally, in the Staples and Health Care sectors the analysts tend to be in tight agreement about the expected earnings (small standard deviation around the mean estimate). These sectors, therefore, will not show up on screens of the biggest estimate revisions. On the other hand, it means that even small changes in the mean estimate can be significant, and it is best to look for large numbers of analysts changing their estimates in one direction, rather than for big changes in the mean estimate.

There are a number of companies that are worth mentioning for the estimate revisions activity. In Staples, Hershey (HSY - Analyst Report) is looking sweet and Phillip Morris (PM - Analyst Report) is smoking, while the grocery stores Supervalu (SVU - Snapshot Report) and Safeway (SWY - Analyst Report) are very weak.

In Health Care, the drug companies like Amgen (AMGN - Analyst Report), Bristol-Myers Squibb (BMY - Analyst Report) and Wyeth (WYE) seem to have found the right prescription. In Tech, the analysts found Apple (AAPL - Analyst Report) to be very tasty. They also like chip stocks such as Texas Instruments (TXN - Analyst Report).

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Contact:
Dirk Van Dijk
Director of Research
312-265-9211
Visit: www.zacks.com