Earnings Roll In

By: Chad Hudson | Thu, Oct 14, 2004
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On Wednesday, prices for base metals plunged. Copper fell 11%, lead dropped 6%, nickel sunk 17%, tin declined 6% and zinc fell 7%. The main reason for the drop was a report published by the International Copper Study Group. It said that Chinese copper demand fell 21% in July. Yes, July. I will not claim to have much insight to the monthly economic data regarding China, but if data that is three months old causes historic declines in these commodities, I question the level of analysis is being done. We know hedge funds have recently entered the commodity pits and have contributed to the volatility. Never mind. I have answered my own question. Even with the declines on Wednesday, most of these metals remain above the level they were just a month ago.

Over the past two weeks there were reports that steel producers have reduced surcharges and accepting lower prices. It is also believed that customers have been building up inventory levels and the latest round of price increases might not have the support that previous increased had. With that said, steel prices are more than double the price of last year. This escalation has caused several manufacturers to reduce earnings guidance. One sector that has been especially hard hit has been the auto suppliers. This week, Dana announced that its earnings will be about thrity cents lower than previously anticipated. Higher steel and other raw material costs along with lower production volumes caused the company to slash earnings per share guidance to a range between $1.60 and $1.65. Previously, the auto supplier forecasted earnings per share of $1.90. Last week, Tower Automotive announced that its loss during the third quarter will be about twice what analysts were forecasting.

While several auto suppliers have been hampered by the rise in steel prices the Big Three auto manufactures have largely been insulated from the rising price. There long-term contracts were negotiated several years ago when steel was much cheaper. This has started to change. DaimlerChrysler was the first automaker to start renewing its steel contracts. According to Automotive News, the price agreed to is 20% higher than the previous price. This will add about $120 to the cost of manufacturing the average car. This will add more pressure to these companies that are already suffering from lower production levels and soaring health care costs. In fact, these two factors were cited by Moody's when it announced it is reviewing General Motor's debt for possible downgrade. The fixed income rating company also cited its concerns regarding losses in its European operations.

Lone Star Technologies was another company that announced earnings would be lower than expected due to higher steel prices. The manufacturer of tubing used in oilfields said that its steel cost rose 20% from last year and will cause earnings per share to be $0.85 to $0.95 per share compared to analysts' forecasts of $1.35.

Last week, Pulte announced that its Las Vegas operations experienced a dramatic slowdown and would earn less than analysts' estimates. This week MDC Holdings reported third quarter earnings that showed much stronger results. Earnings per share advanced over 50% on a 28% increase in revenues. Gross margins increased 340 basis points to 28.2% driven by a $33,000 increase in the average selling price. The company did say the Vegas orders were about half what they were last year, but remained "healthy."

A few restaurants have reported third quarter earnings this week. MCD reported another strong quarter with sales advancing 10.1% from the third quarter last year. US same store sales increased 8.5% during the third quarter. The quarter ended especially strong as September same store sales were up 10.6%. Currency did play a factor in total sales as sales grew a more meager 6.6% during the third quarter. Sonic reported 8.8% same store sales and EPS growth of 16%. CEC Entertainment experienced a 36% increase in earnings per share, while only showing a 0.7% increase in same store sales.

Gannett said that despite a $50 per ton announced price increase, transaction prices have barely moved. However, it did say that its pricing was 10% more than last year. Daily publisher consumption trending below year-ago levels. The advertising environment improved throughout the third quarter led by a 20% increase in employment and 14% increase in real estate. On the local level, furniture, health, financial, and home improvement were strong. Department stores, entertainment, grocery, and telecom was weak. Classified advertising increased 12% led by help wanted (+20.4%) and real estate (+14.1%). Automotive advertising fell 2.1%. Forty-four percent of its papers saw employment advertising increase by double-digits. Conversely, nationally, auto was up over 20%. The company attributed the large discrepancy by saying auto dealers are not as optimistic as the manufacturers. The company concluded its conference call presentation by saying that the economic recovery will be choppy and less robust than earlier predictions.

The New York Times reported September revenue this week that revealed that there has been little improvement from last year. Advertising revenue increased 2% with strength coming from telecommunications, national automotive, international fashion and technology. Countering what Gannett said, the New York Times saw growth in department store advertising, but weakness in help-wanted and real estate.

While the two newspaper companies experienced different results from the retail sector, the latest tally from the ISCS shows that retail sales increased 0.5% from the previous week, but the year-over-year increase dropped to 2.4% from 2.6% last week. Another indication that retail sales are lackluster was the earnings pre-announcement from Jones Apparel Group. The clothier lowered third quarter guidance from a range of $0.80 to $0.84 per share to $0.75 to $0.77 per share. It lowered fourth quarter earnings more substantially, from a range between $0.56 and $0.59 to between $0.40 and $0.45. The company cited consumer confidence, employment and of course the hurricanes as reasons for the weakness.

The number of pre-announcements over the past couple weeks has accelerated. The ratio of negative pre-announcements over positive announcements has increased to 2.1 from 2.0 at the beginning of the month and only 1.8 at the beginning of August. Earnings growth estimates have slipped to 13.0%, down from 13.8% at the beginning of October. Only about 10% of the S&P 500 has reported third quarter earnings. As the rest of the companies report earning over the next two weeks, investors should gain more clarity on business conditions and the prospects for the rest of the year.


 

Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis
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