July 28, 2008

Earnings: ExxonMobil, Starbucks, and More

The summer's earnings season has had as many surprises and plot twists as a Hollywood blockbuster, and it's only halfway through. In the next few days, almost 25% of Standard & Poor's 500 companies are set to unveil their second-quarter results. On top of that, traders will closely watch crucial economic reports [BusinessWeek.com, 7/24/08] on employment, consumer confidence, and the gross domestic product.

Most major financial companies have already posted results, which have been carefully scrutinized as the credit crisis lingers. Companies in other industries still have a chance to impress, reassure, or disappoint investors with their quarterly updates.

According to Thomson Reuters, second-quarter earnings for the Standard & Poor's 500-stock index are expected to fall 17.9% from a year ago. That's only slightly worse than analysts had predicted, and much better than the past three quarters, when results "sharply deviated" from predictions, says Ashwani Kaul, director of research at Thomson Reuters (TRI).

The next several days will put those predictions to the test. Here are the major stocks to watch:

1. ExxonMobil (XOM)

With a market capitalization of $430 billion, ExxonMobil is the largest company in the world, and investors are expecting very big things when it reports earnings July 31. Analysts are expecting record revenues, since oil prices climbed to new highs in the second quarter. According to analysts polled by Thomson Reuters, sales are expected to total more than $144 billion, a 47% increase from a year ago, while earnings are expected to rise 14%.

But can ExxonMobil meet the high expectations? Energy stocks "have had such an incredible run," says Michael Yoshikami, president and chief investment strategist at YCMNET Advisors.

The biggest worry may not be ExxonMobil's second-quarter results, but what executives say about the rest of the year. Crude oil hit a record above $147 per barrel in early July, but oil now trades above $123, a 16% decline. Georges Yared, president of Yared Investment Research, says lower oil prices could take a big bite out of the profits that investors and analysts are expecting from ExxonMobil in the second half of the year.

2. Disney (DIS) and Viacom (VIA)

With the price of a gallon of gasoline near $4 nationwide, investors still worry about U.S. consumer spending. Two large consumer discretionary stocks reporting earnings this week are Viacom on July 29 and Walt Disney Co. on July 30.

Despite worries about a slump in advertising spending, these media companies are still expected to boost profits compared to a year ago. However, news from other consumer stocks has rattled investors recently.

A very different consumer stock, retailer Costco Wholesale (COST) warned July 23 of lower-than-expected profits, news that sent its shares falling 15% [BusinessWeek.com, 7/24/08]. The discounter was one of the few retail stocks still holding up, but its news is "a good indication that the consumer is starting to get squeezed," says Dave Rovelli, managing director of equity trading at Canaccord Adams.

Disney, the larger of the two companies, owns a variety of businesses, including theme parks, movie studios, ABC television, ESPN, and radio stations. The company's diverse properties could help protect it from a downturn.

One positive sign for Disney is evidence that this has been a good summer for movie attendance, says Yoshikami. However, more people going to their local multiplex might be a sign that fewer Americans are traveling on long vacations. That could hurt Disney's theme-park business, he says.

3. Starbucks (SBUX)

Starbucks' plan to close 600 stores has been a hot topic of conversation recently, with many customers pleading with the company to keep their local coffeehouse open. Chairman and Chief Executive Howard Schultz is trying to turn around Starbucks at a tough time, when the economy is slow and cash-strapped consumers are reluctant to treat themselves.

Starbucks reports earnings on July 30, and analysts expects profits to fall from a year ago. But Yared sees signs of hope for Starbucks. "So much of the bad news is in the stock already," he says. Investors and analysts will be listening closely for a "glimmer of hope," some sign Schultz's actions are starting to work, Yared says.

4. Tyco International (TYC)

This conglomerate -- which makes security, fire protection, safety and flow control, and electrical products -- reports earnings July 31. The king of conglomerates, General Electric (GE), largely met Wall Street's expectations when it reported earnings a couple of weeks ago.

Because conglomerates contain so many different businesses, Wall Street can find it difficult to predict earnings. Tyco, however, has made it easier than the sprawling GE. The second quarter marks the one-year anniversary of Tyco's spin-off of its health-care and electronics units.

Morningstar (MORN) analyst Eric Landry expects Tyco's profits to be driven by strong sales of its fluid technology business, which is seeing strong demand from the energy sector and from other infrastructure projects around the world. "End market demand is sizzling," Landry says.

5. Manitowoc Co. (MTW)

Industrial companies face a contradiction these days. Because of global investment in infrastructure, many industrial firms are generating strong sales outside the U.S. However, profits are hurt by the rise in energy, steel, and other commodities, and the U.S. economic slowdown does have an effect, especially on housing-related businesses.

Manitowoc reports earnings after the market closes on July 28. More than four-fifths of the company's revenues come from selling construction cranes, which are in hot demand worldwide. Longbow Research analyst Paul Bodnar wrote July 22 that Wall Street has "underestimated the fundamental strength in the crane market," despite higher raw material costs.