The earnings crunch begins in earnest this coming week, with companies from Johnson & Johnson (NYSE: JNJ) and PepsiCo Inc. (NYSE: PEP) to Southwest Airlines Co. (NYSE: LUV) and Harley-Davidson Inc. (NYSE: HOG) scheduled to report results for the quarter just ended. But with the ongoing turmoil in the markets, much attention is on the tech and financial sectors. This week will provide plenty to mull over on both counts.
Wall Street expectations for tech stocks are fairly optimistic. Analysts surveyed by Thomson Financial are looking for chip maker Altera Corp. (NASDAQ: ALTR) and software/service company iGate Corp. (NASDAQ: IGTE) to be the sector's biggest earnings gainers of the week. Altera is expected to report earnings of 30 cents per share (up 33.3% from a year ago) on revenue of $355.1 million. Altera had previously forecast flat sales for the quarter, and shares fell to a 52-week low last week. iGate is expected to report earnings of 14 cents per share (up 42.9%) on revenue of $55.6 million. India-based iGate recently spun off its Mastech consulting services. Shares are down 45.0% in the past three months, and also reached a new 52-week low last week.
San Jose-based Novellus Systems Inc. (NASDAQ: NVLS), on the other hand, is expected to report that net income tumbled 90.4% from a year ago to 4 cents per share, on revenue of $245.6 million. Novellus fell to a 52-week low early last week, and shares are down 44.5% year to date.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from Alcoa (NYSE: AA) and General Electric (NYSE: GE) kicking things off last week, here's a look at what Wall Street is expecting from many of the companies scheduled to report this coming week.
Analysts surveyed by Thomson Financial are expecting the following companies to report a rise in earnings when compared to the same period of the previous year.
Nucor Corp. (NYSE: NUE): $1.80 EPS (36.6%) on sales of $6.4 billion (+53.0%)
Google Inc. (NASDAQ: GOOG): $4.74 EPS (24.9%) on sales of $3.9 billion (+41.6%)
Nokia Corp. (NYSE: NOK): 56 cents EPS (23.2%) on sales of $19.9 billion (+17.8%)
CSX Corp. (NYSE: CSX): 90 cents EPS (21.1%) on sales of $2.9 billion (+12.8%)
Altera Corp. (NASDAQ: ALTR): 27 cents EPS (18.5%) on sales of $346.7 million (+8.4%)
IBM (NYSE: IBM): $1.82 EPS (+17.6%) on sales of $25.9 billion (+9.0%)
eBay Inc. (NASDAQ: EBAY): 41 cents EPS (17.1%) on sales of $2.2 billion (+18.0%)
Genentech Inc. (NYSE: DNA) to report Q2 earnings; conference call at 4:45 pm.
Tuesday, July 15
PDUFA date for Sciele Pharma, Inc. (SCRX)'s NDA for Aquelle for the treatment of head lice by asphyxiation.
Johnson & Johnson (NYSE: JNJ) to report Q3 earnings; conference call at 8:30 am.
Senate Finance Committee: International Enforcement of Intellectual Property Rights meeting at 10:00 am with Sony Corp. (NYSE: SNE) and Pfizer Inc. (NYSE: PFE) appearing.
Readers of this space know that my investment bias is toward large-cap companies with demonstrated business models that have a competitive advantage in established markets, preferably with a favorable global trend as a support. And with the above in mind, Honeywell is worth a review.
Honeywell (NYSE: HON) is one of the world's leading automation / control manufacturers for heating, air conditioning, ventilation systems and a key aerospace contractor. Further, Honeywell has the diversity Wall Street likes -- in this case, business diversity within a company.
Thermostats and aircraft maintenance would seem like business lines at opposite ends of the spectrum, but they are at Honeywell's core, and they speak to the company's strength.
Analysts like HON's aerospace division (36% of revenue), which manufactures cockpit controls, power generation equipment and wheels/bakes for commercial/military aircraft. The division also makes jet engines for regional/business jet manufacturers.
According to this article at CNBC, industrial manufacturer Honeywell (NYSE: HON) doesn't see the current recession (or slowdown, if you believe recession is too harsh a term) hurting its plans all that much. Shareholders of the company should certainly rejoice at management's assertion that the company will still be able to deliver somewhere between $3.70 and $3.80 in earnings per share for 2008.
Reaffirmation is always a good thing in a market as tempestuous as this one has been. The question is, when you see a news item such as this, what actionable inference can you take from it? In other words, should you be looking at Honeywell? Investors should indeed perform some due diligence on the company, because based on the current price of the stock, Honeywell isn't overly pricey. Plus, the stock is really close to a 52-week high. I'm not the biggest fan of buying at 52-week highs, but for those who believe in trading via chart science, a stock near the top end of a range is oftentimes attractive since, in theory, a majority of the weak holders will be out of it by that point.
But being patient for a pullback is usually a virtue with any strong stock. And here's something else to consider. Competitor United Technologies (NYSE: UTX), which has a similar dividend yield to Honeywell, is further away from its 52-week high, but well off its 52-week low. Does that make UTX more attractive? Possibly. And Goodrich Corp. (NYSE: GR), while not having as high a dividend yield, is also not at a 52-week high. So while the reaffirmation bodes well for Honeywell, definitely kick the company's financial tires a bit before making any decision, and look around to similar companies that you might think are better values.
Disclosure: I don't own shares in any company mentioned here; positions can change at any time.
The mood this week has changed sharply from the post-GE disappointment, despite weak economics still hitting the screens every morning in economic numbers. In fact, the week went much better than it was looking on Monday, and everyone remembered the old chant, "markets climb up a wall of worry." Even oil heading above the $116 per barrel isn't killing things. Here are unofficial closing levels:
Advanced Micro Devices Inc. (NYSE: AMD) down after reporting a net loss of $358 million on $1.5 billion in revenues. Losses were narrowed from the same quarter last year. The company also released plans to cut additional cost. If insiders want that stock to go up, they need to fire Hector Ruiz. Shares were down 1.6% at $6.09 going into the close.
TheStreet.com's Jim Cramer says the bad news should make sure the Fed keeps cutting.
We haven't broken the spiral yet. The waves off of homes just keep fighting new areas to hurt, new municipal projects to ding, new large jobs numbers lost, new margin calls for places like Thornburg (NYSE: TMA) (Cramer's Take), which I thought was out of the woods.
Then I saw the TMA news and the verbiage that there was another problem in the markets in February that will require margin calls. This is the Alt-A culprit, the hard-to-value loans given to people who look likely to return the money because they have good solo jobs but on paper haven't been performing. TMA has a ton of jumbo loans to these people. Only back-from-the-grave Indymac (NYSE: IMB) (Cramer's Take) is worse.
Truth be told, we know these are all momentary issues. No bank seems willing to let anyone fail here, and neither TMA nor IMB will be so hurt by these new issues that they can crush the market. Same as Fannie Mae (NYSE: FNM) (Cramer's Take) yesterday -- staggering losses, but so what?
It's a Wall Street axiom, but one that's worth repeating in choppy markets: diversity provides greater safety. That's diversity across a portfolio, and diversity within a company, and a good example of the latter is Honeywell International Inc. (NYSE: HON).
Thermostats and aircraft maintenance would seem like business lines at opposite ends of the spectrum, but they are at Honeywell's core, and they speak to the company's strength.
Analysts like HON's aerospace division (36% of revenue), which manufactures cockpit controls, power generation equipment, and wheels/brakes for commercial/military aircraft. The division also makes jet engines for regional/business jet manufacturers.
Further, analysts really like HON's automation/control division (35% of revenue), which makes home/office climate control equipment. Analysts see solid demand for HON's next-generation energy-efficient controls as businesses and homeowner re-emphasize energy efficiency, due to high energy prices. The Reuters F2007/F2008 EPS consensus estimates for HON are $3.16 to $3.73.
TheStreet.com's Jim Cramer says 10 crucial factors took their toll during that dreadful session.
I'm still trying to get my arms around what happened to the market Friday. The action can be traced, I believe, to the following crucial factors:
1. The bull market in oil services, the best one around, got the stuffing knocked out of it by Schlumberger's (NYSE: SLB) (Cramer's Take) quarterly report, which showed that the U.S. is so bad that it can kibosh even the best international driller. I think that the problems are not specific to Schlumberger in that nearly all oil-services companies except for Transocean (NYSE: RIG) (Cramer's Take) have a tad of North American exposure, and a tad is toxic.
2. Caterpillar (NYSE: CAT) (Cramer's Take) once again was felled by how awful the U.S. economy is, with a quarter that reminded us that we are just a few footsteps from recession. Without aggressive Fed rate cuts, we are there in six months.
3. Honeywell (NYSE: HON) (Cramer's Take) and 3M (MMM) (Cramer's Take) had been terrific stocks for so long that we got spoiled by them and their earnings power overseas. They were felled by the U.S.
4. Mortgages: Wachovia (NYSE: WB) (Cramer's Take), a conservative lender, got destroyed by mortgages, or, more specifically, home equity loans, which are capable of taking down pretty much everything. Go no further than the honest analysis that E*Trade's (NASDAQ: ETFC) (Cramer's Take) Mitch Caplan offered this week to see what I mean.
5. A belief that a mortgage insurer is going to go belly-up. The action indicates that this is possible, and I credit my friend Doug Kass for this insight.
6. Mutual fund selling season: There are 10 more days to go to sell winners and sell losers and lock in some capital gains without big tax consequences. With so many funds up, that makes a ton of sense.
7. Expiration. Once you took out the bottom strikes, it looks like there were a lot of puts sold that kicked in to be longs. Check out the Schlumberger 105 put position if you want to see how this works. That was an accident waiting to happen.
8. Ridiculous bullishness off of the Investors Intelligence numbers, which showed more than 60% bulls. That's always a danger sign.
9. Worries about the Fed not doing the right thing. There is a persistence of thought that the Fed doesn't get it, even after the 50-basis-point cut. They get it, believe me.
10. Anniversary of the crash. That 20-year jinx was big, and it caused people down 200 to freak out and sell to beat the down-500 crowd.
That's my quick look at what caused Friday's rout. But more work on what's next is needed.
Random musings: Friday I took my 16-year-old daughter to visit colleges. I didn't check in once with a blog entry after the market opened. It was a bad day not to check in. For those who have been helped by these columns on the big down days, you have my apologies. But those who know me well know that I have done enough damage with my obsession. It was the right thing to do. I have to, at some point, start doing what is right by my family.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Caterpillar and Transocean.
"The third-quarter earnings that are coming out are the worst but we don't see a sharp bounce-back,'' Christina Bank & Trust's Scott Arminger told Bloomberg News. "Financial earnings will be pretty mediocre for a couple of quarters going forward.''
The maker of Post-It notes and countless other products reported net income of $960 million, or $1.32 per share, compared with $894 million, or $1.18 per share, a year earlier. Revenue rose 5.5% to $6.2 billion. Excluding one-time earnings, profit was $1.29 compared with $1.17 a year earlier. Analysts expected profit of $1.28 and revenue of $6.29 billion, according to Thomson Financial. 3M raised its earnings forecast to $5.54 to $5.62 for this year, compared with previous guidance of $5.40 to $5.60. It expects full year sales growth excluding the divestiture of the branded pharmaceutical business of 7% to 8%.
Honeywell's profit rose 14% to $618 million, or 81 cents per share and revenue rose 10 percent to $8.74 billion, helped by strength in its commercial aviation, defense and space markets. The results beat Wall Street consensus expectations of 82 cents on revenue of $8.59 billion.
TheStreet.com's Jim Cramer believes that if this chatter proves true, this major index could rocket to his target for it.
If the Bear Stearns (NYSE: BSC) (Cramer's Take) chatter is true -- that Warren Buffett, among others, could buy a stake in the broker -- we could quickly blow through Dow 14,000.
I say that because the weak link in the Dow is the financials. You get Citigroup (NYSE: C) (Cramer's Take) up through the $50s, JPMorgan (NYSE: JPM) (Cramer's Take) to the $50s and AIG (NYSE: AIG) (Cramer's Take) to the $70s -- all of which would happen if the financials ignite -- and you can be within spitting distance of my 14,548 target. Don't forget that American Express (NYSE: AXP) (Cramer's Take) could ramp on that move, too.
Take a look at that Dow. It is overweighted in finance vs. resources. So you need that group to work to get to 14,500. A Buffet stake would say this: "The group's woes are way overdone and it is time to scoop these up." Nobody will think twice about it.
And if it happens, it will cause a panic to the upside.
Very high stakes. But Landon Thomas, the reporter at The New York Times who broke the story, is real good. I trust that he would not have run this without really having the story.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup, AIG and Caterpillar.
To some extent, the new conglomerates have simply become lucky. They are riding a global infrastructure spending boom for airports and airlines, power systems, waste water and environmental projects, and hospitals and health care systems, not to mention record government spending on military projects and security surveillance. Their ability to assemble product offerings from different industries is a source of strength, they say.
While I'd be extremely skeptical if someone referred to the recent strength of conglomerates as some sort of new paradigm, it really may be different this time. The conglomerate boom of the 1960s and 1970s ended in disaster for many of the high-fliers, but changes have been made. Private equity firms have employed a conglomerate-like model to generate huge returns for their investors, and smarter management and more competent deal-making is leading to better-crafted hodgepodges of divergent businesses.
Honeywell International (NYSE: HON) CEO David Cote is also quoted in the Times piece: "When you look back at the history, the companies were put together without any real integration. They were really just holding companies. They didn't try to do anything to make the businesses better."
The old-time model of hyping the stock of a conglomerate and using it to acquire companies at a lower price/earnings multiple is no longer in vogue, mercifully.
For an interesting, although not entirely enjoyable, look at the history of the conglomerate business model, pick up a copy of The Rise and Fall of the Conglomerate Kings by Robert Sobel.
A few companies will have break-out quarters this season, and it appears that Honeywell (NYSE: HON) has made the list. Net sales rose to over $8.5 billion from from $7.9 billion last year. Net income rose from $521 million to $611 million.
The company also increased its previously stated 2007 sales guidance to $33.9 billion and its earnings per share range to $3.10-3.16
Honeywell's improving fortunes were lead by the aerospace division. The company's defense and space segments picked up new government contracts. This growth was buttressed by improvements in the automation segment, which includes home security company ADI.
Honeywell's EPS of $0.78 beat the Reuters consensus of $0.76.
The Honeywell numbers are a good indication that the industrial and automation portion of the economy is in fine shape and that financial companies and tech firms are not the only hope for the economy remaining in good shape.
Based on early trading, shares in Honeywell will probably hit a new 52-week high today.
MOST NOTEWORTHY: Symantec (NASDAQ:SYMC), Medimmune (NASDAQ:MEDI) and Ford (NYSE:F) were today's most notable upgrades:
Goldman Sachs added Symantec and Medimmune to its Conviction Buy List. Goldman sees potential Q3 upside for Symantec and believes the company has an attractive valuation.
Keybanc/McDonald upgraded Ford to Hold from Sell, saying it expects the rapid deterioration in earnings that occurred in 2006 to taper off as the company implements cost cuts and capacity rationalization actions.
OTHER UPGRADES:
Gilead (NASDAQ: GILD) was upgraded to Above Average from Average at Caris & Co. as the firm believes the shares will rise on the potential NDA filing of AIR-CF2 in Q2 and its potential approval in early 2008.
Honeywell (NYSE: HON) was upgraded to to Buy from Above Average at Caris & Co. on expected top-line growth driven by global macro trends.
The earnings crunch begins in earnest this coming week, with companies from Johnson & Johnson (NYSE: JNJ) and PepsiCo Inc. (NYSE: PEP) to Southwest Airlines Co. (NYSE: LUV) and Harley-Davidson Inc. (NYSE: HOG) scheduled to report results for the quarter just ended. But with the ongoing turmoil in the markets, much attention is on the tech and financial sectors. This week will provide plenty to mull over on both counts.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from 
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