Goldman, Intel Give Profit 'a Pulse' After Record 2-Year
Drop
Oct. 6 (Bloomberg) -- Goldman Sachs Group Inc.,
JPMorgan Chase & Co. and Intel Corp. may this quarter
lead companies worldwide to the first profit increases in
more than two years, ending the longest earnings
recession on record.
Buoyed by finance and semiconductors, profits at the world's biggest companies are projected to
grow 63 percent in the final three months of 2009, snapping nine straight quarterly declines.
In the third quarter just completed, earnings for companies in the S&P 500 Index may drop 23
percent from a year ago, when a lending freeze led to the worst financial crisis since the 1930s,
according to analysts' estimates compiled by Standard & Poor's and Bloomberg. Alcoa Inc. is the
first member of the Dow Jones Industrial Average to report on Oct. 7.
"Most management teams are seeing a pulse in their business," said Lawrence Creatura, a
portfolio manager at Federated Clover Investment Advisors, which oversees $407 billion. "Last
year at this time markets were rigid with fear, as was the consumer. It's going to be pretty easy to
do better than that even if the economy is firing on one cylinder."
The fourth-quarter may be an "inflection point" that signals a turn in profit, said Creatura, who is
based in Rochester, New York.
JPMorgan, Goldman Sachs and Intel's fourth-quarter gains will be marked by easy comparisons
to last year, when credit markets seized and banks choking on billions of dollars in real- estate
losses stopped lending. U.S. gross domestic product shrank 5.4 percent a year ago and consumer
spending stalled.
Financials First
Analysts project S&P 500 financial companies' fourth- quarter earnings will more than double
from a year ago, when five of the six biggest banks reported a loss of more than $1 billion,
according to estimates compiled by Bloomberg. Financial institutions worldwide have reported
more than $1.6 trillion in credit losses and writedowns since 2007, Bloomberg data show.
Goldman Sachs and JPMorgan, both based in New York, and other banks are benefiting from
lower funding costs and more lending. The companies also face fewer writedowns on secured
debt as home prices halt their descent, said David Dietze, president and chief investment
strategist at Point View Financial Services in Summit, New Jersey.
"Real estate is your key collateral behind many of these banks' loans, and if collateral values start
to stabilize, that should help stem the tide of write-offs," said Dietze, who helps manage more
than $100 million. If that happens, "Earnings growth will be phenomenal."
Jobs Picture
For the third quarter, the largest financial companies will likely report higher earnings than a
year ago, when New York- based JPMorgan took about $5.8 billion of writedowns and credit
provisions, and banks began feeling the effects of the September collapse of Lehman Brothers
Holdings Inc.
Morgan Stanley is expected to post the first gain from continuing operations in a year, while
Citigroup Inc.'s operating loss is expected to shrink, according to analysts.
For others it will take longer.
The Oct. 2 report of accelerating job losses in the U.S., the world's biggest economy, signals that
unemployment, now at 9.8 percent, will remain a drag on consumer spending. Federal Reserve
Chairman Ben S. Bernanke said Oct. 1 that U.S. economic growth will be insufficient to lower
the unemployment rate below 9 percent by the end of 2010.
United Parcel Service Inc., the world's largest package- shipping firm, handles half of all
deliveries in the U.S. and is unlikely predict an increase in domestic volume for the final months
of 2009 when it reports third-quarter results on Oct. 22, said David Campbell, an analyst at
Thompson Davis & Co. in Richmond, Virginia.
Production Cycle
Farther back in the production cycle profits are turning around, as reflected in rising global stock
prices.
Improving sales at Intel, the world's largest semiconductor manufacturer, point to a recovery that
extends beyond the thawing financial companies. Semiconductor earnings in the fourth quarter
are projected to more than triple from last year, when electronics manufacturers slashed orders.
Intel, based in Santa Clara, California, is projected to report fourth-quarter profit almost doubled
to 35 cents a share, the average of 26 estimates, after an estimated 23 percent drop in the period
just ended.
That hoped-for recovery, along with the fact that 72 percent of S&P 500 Index companies
exceeded analysts' average profit estimates for the second quarter, helped lift the benchmark
index to a 15 percent July-September gain, the second- straight gain of that magnitude.
'Some Recovery'
Europe's Dow Jones Stoxx 600 Index advanced 18 percent last quarter, and the benchmark MSCI
Asia Pacific surged 14 percent in the quarter, following a 28 percent gain in the second.
"There is some form of recovery taking hold," said Michael Shinnick, who helps manage $6
billion, including Intel shares, at South Bend, Indiana-based Wasatch Advisors Inc. "There was
just an absolute seize-up in the market last year."
U.S. technology demand will begin to increase in the fourth quarter, followed by a global
recovery in 2010, research firm Forrester Inc. said Sept. 29.
Sales and profit at Microsoft Corp., the world's biggest software maker, probably fell to an
almost three-year low in the third quarter. Both are projected to resume growth in the final three
months of the year, aided by the Redmond, Washington-based company's release of the
Windows 7 operating system.
Spotty Turnaround
International Business Machines Corp., reporting on Oct. 15, and Apple Inc., on Oct. 19, are
expected by analysts to post increased third-quarter profit. SAP AG, the world's largest maker of
business-management software, may say net income increased 17 percent in the quarter as cost
cuts took hold.
Outside of finance and semiconductors, fourth-quarter profit for the S&P 500 Index companies
may be spotty. Investors need to be careful that stock prices aren't overvalued compared to
company earnings, said John Carey, portfolio manager at Pioneer Investment Management in
Boston.
"You always have to compare business results with share prices and be sure that one hasn't
gotten ahead of the other," said Carey, who helps oversee $200 billion in assets.
Consumer demand won't fully recover until 2011, leading U.S. retailers to slash expenses and
inventories. Those moves should help the companies exceed analysts' pessimistic estimates, said
Ken Perkins, president of Retail Metrics LLC, a research firm based in Swampscott,
Massachusetts.
Lower Costs
"Some consumers are carefully dipping their toes in the water, but the job market is a real
headwind," Perkins said.
Analysts expect Wal-Mart Stores Inc., the world's largest retailer, to post a 15 percent gain in
fourth-quarter net income after steady profit in the third for the Bentonville, Arkansas- based
merchant. Retailers earn a third or more of their profit in the final three-month period of the year.
Last year's holiday season was the worst in four decades.
Consumer products companies will get a break in the fourth quarter as commodity costs and
advertising rates have declined and economic contraction has slowed, Ali Dibadj, a New Yorkbased analyst with Sanford C. Bernstein & Co., wrote in a research note Sept. 29.
Colgate-Palmolive Co., the world's biggest maker of toothpaste, will post a 16 percent gain in
third-quarter profit and a 21 percent rise in the fourth quarter, analysts project.
Baoshan Iron
For steelmakers, "the good news is right around the corner," said John Wong, a fund manager
with CQS UK LLP in London, which manages the New City Natural Resources Fund. The
industry is facing easy comparisons this quarter and into 2010 after construction and production
collapsed last September.
"The fourth quarter year-on-year will look much better, and the first quarter next year will look
even better again because first quarter 2009 was a complete disaster," Wong said.
Baoshan Iron & Steel Co., the world's third-biggest steelmaker, may earn 0.18 yuan a share in
the third quarter, up sixfold from the previous three months, as the government's stimulus
spending boosted prices and demand, according to China International Capital Corp. Profit a
year earlier was 0.16 yuan.
Ma Guoqiang, president of the Shanghai-based company, said Aug. 31 steel prices will reverse
recent declines because there's "healthy" demand and the global economy is recovering.
Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., Japan's three largest automakers,
may report lower earnings for the three months ended Sept. 30 as a stronger yen offset gains
from government incentives in the U.S., Europe and Japan.
Samsung's Profit
Toyota City-based Toyota may post a net loss of 140.5 billion yen ($1.6 billion) in the quarter,
according to a Bloomberg survey of three analysts. Honda may report a profit of 2.44 billion yen
and Nissan may post net income of 11.8 billion yen, according to the survey.
South Korea's Samsung Electronics Co., the world's largest maker of televisions, may report
third-quarter profit more than doubled to 3.24 trillion won ($2.8 billion) as the weaker won
helped increase the value of overseas earnings, according to the median estimate in a Bloomberg
survey of 14 analysts The won has lost about 13 percent of its value against the yen in the 12
months ended Sept. 30.
Siemens AG, Europe's largest engineering company, may return to profit after a year-earlier loss,
Sanford C. Bernstein analyst Martin Prozesky predicts. Net income at the Munich-based
company may reach 1.29 billion euros, he estimates, after a loss of 2.47 billion euros a year
earlier.
Energy Prices
A turnaround will be harder for energy companies. Third- quarter profit at Exxon Mobil
Corp.,Chevron Corp. and ConocoPhillips, the largest U.S. oil companies, and Royal Dutch Shell
Plc and BP Plc, Europe's biggest, probably fell after the recession sapped fuel demand, leaving
crude-oil prices more than 50 percent below the record set in July 2008.
Chinese oil demand, one of the forces that spurred last year's record surge in energy prices and
lifted earnings for producers, isn't going to be as strong as anticipated, said Barry R. James of the
James Advantage Funds in Dayton, Ohio.
"The amount of consumption they would have won't be quite as much, plus the rest of the world
economy is at stall speed," said James, who holds Exxon, Chevron and Conoco among the
almost $2 billion in investments.
Airline revenue probably won't rise until mid-2010 at the earliest, Helane Becker, an analyst at
Jesup & Lamont Securities in New York. Group losses were $1 billion or more for each of the
past four quarters.
Government Stimulus
UPS, based in Atlanta and considered a proxy for U.S. economic health, has had six straight
quarters of shrinking domestic volume and may post its seventh in the third quarter as businesses
and consumers shipped less, said analyst Campbell of Thompson Davis.
"We're still in a downturn," Campbell said. "Things have definitely improved, but we're a few
quarters away from growth."
Government stimulus spending will boost companies that depend on public works, analysts say.
The U.S. government is spending $787 billion to jumpstart the economy, including $48.1 billion
for transportation projects.
Analysts expect sales at Caterpillar Inc., the world's largest maker of construction equipment to
sales to rebound in the final three months of the year. Fourth-quarter earnings per share may
jump to 34 cents, excluding some items, from an estimated 4 cents in the just-ended period,
during which Caterpillar expanded temporary factory shutdowns and continued to cut other
costs, analysts predict.
Global Economy
Dealers slashed inventories and customers didn't buy as many bulldozers and excavators this
year, marking the worst decline in Caterpillar's markets since the 1930s. The Peoria, Illinoisbased company's quarterly loss from January to March was its first in 16 years.
Dow Chemical Co., the largest U.S. chemical maker, is benefiting from lower costs for oil- and
gas-based raw materials, spending cuts and slowly expanding global demand, said Richard
Vanden Boogard, who helps oversee $47 billion at Victory Capital Management.
The global economy is recovering faster than most forecasters expected earlier in the year,
Vanden Boogard said.
Among Europe's drugmakers, Basel, Switzerland-based Novartis AG probably grew faster than
the overall pharmaceutical industry during the third quarter, said Birgit Kulhoff, an analyst at
Rahn & Bodmer in Zurich. Profit excluding some items for the period is estimated to rise to
$2.22 billion from $2.09 billon a year earlier, according to Bloomberg estimates.
Net income at London-based GlaxoSmithKline Plc probably rose to 1.57 billion pounds ($2.5
billion) from 1.03 billion pounds a year earlier. The U.K. company's respiratory medicines
helped drive third-quarter growth, while the impact of patent expirations may have eased,
Kulhoff said.
"Six months ago, if you tried to envision these headlines, people would say, 'You are crazy,' but
here we are," Vanden Boogard said. "The big question is, what are headlines going to be six to
nine to months from now? Will they be saying demand is even better? I think it will be better."
To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1