General Mortgage Corporation

By: Chad Hudson | Thu, Apr 17, 2003
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Investors have clearly turned their focus on earnings this week. While it is too early to call a trend, it appears first quarter earnings are a bit better than estimates, but companies are a tad more cautious about the rest of the year. This week and next week I will run through a bunch of different companies, which will hopefully give insight to the state of the economy.

This quarter marks a milestone in the economy. While it has been close, General Motors now makes more money from its finance division (GMAC) than from selling cars. During the first quarter, net income from automotive operations was $546 million, which was an increase of 10% from last year. Net income from GMAC was $699 million up 66% from last year. The mortgage group accounted for over half, 53%, and more than double from last year results. GM also said, "[it] is now less certain of its ability to achieve its prior 2003 guidance of $5.00 earnings per share, given the uncertain economic conditions around the globe." GM still expects it can earn "at least $1.00 per share" in the second quarter. A little math reveals that the second half of the year is expected to be below last year's results. Adding the $1.81 GM earned in the first quarter and the buck it expects in the second quarter yields $2.81. During the second half of 2002, GM earned $2.82. If GM just matched last year's results during the second half it would earn $5.63 for 2003. During the conference call, Vice Chairman Bob Lutz, commented that April sales were, "slightly behind track from what we were hoping." This is after GM increased its zero percent financing incentive on its entire line - save two models.

The auto industry is the one bright spot in manufacturing. BorgWarner, the world's largest maker of turbochargers for cars, announced it would beat earnings estimates for the first quarter. Also proving strength in the automotive market came from Eaton. Its automotive unit boosted sales by 14%, with total sales rising 12%. Looking at the wider economy, Eaton said that total fluid-power industry shipments fell 2% in the quarter, while its sales increased 9%, adjusting for acquisitions. Parker Hannifin might be bearing the brunt of the industry as it announced Tuesday that sales rose 4% and net income fell 7%. To little surprise, the company said sales were negatively affected by declining sales to aerospace customers. Eaton did lower growth expectation for the second half based on auto sales trailing off in the second half. Eaton also noted that they did not see any weakness in March due to the war.

Also on autos, Superior Industries, maker of aluminum wheels, increased revenues by 11.5%, and increased units shipped by 3.3%. Additionally, Gentex, maker of automatic dimming mirrors, announced sales increased 29% in the quarter ending March 2003 with shipments up 23%.

The advertising industry is also benefiting from the heavy promotional activity. While March trailed off, January and February were better than expected for several media companies including the New York Times. At the New York Times, advertising rose 5% for the quarter, as January and February countered a 1.6% decline in March. But as the first quarter was ok, the outlook is very cloudy. During its conference call, Leonard Forman, CFO of the New York Times, noted that the earnings outlook is more cloudy than ever in his 30 year career. Besides autos, real estate is doing very well with travel and employment being the clear laggards.

Vegas is also feeling the pinch of the decline in travel. Plus, labor costs are up and spending is down according the MGM Mirage. They are not blaming the war. They simply are saying the economy is weak and our patrons don't have as much money as they used to.

Possibly the biggest surprise is coming from the transportation companies. Trucking companies are reporting much better than expected earnings. JB Hunt earned $0.49 per share in its second quarter, doubling Merrill Lynch's earnings estimate and beat the consensus by 75%. The 21.5% EPS growth was driven by a 4% increase in pricing, which helped revenue grow by 12%. Roadway also was able to increase prices for its services, up 3.3% per ton. Sales growth of 18% was helped by the bankruptcy of Consolidated Freightways last year.

GE perhaps tells the story of the economy. Industrial sales declined 6% and financial service revenue was up 6%. GE said that the outlook for 2003 was mixed with evidence on both sides of the fence. High oil prices, lower plastics volume, air travel and the war point to weakness. Strong service growth, strong productivity, high scatter prices at NBC are some of the positives GE sees.

Caterpillar's first quarter sales increased 9.3% and net income grew 61% helped by cost cutting and a weaker dollar. Going forward, Caterpillar is a little more cautious than three months ago. Previously, it expected sales to increase 3% this year and now it expects growth between 0% and 4%. Additionally, it expected the second half of the year to provide most of the growth, now it appears Caterpillar expects the rest of the year to be flat. The 9.3% revenue growth equals $412.5 million in additional revenue for the first quarter. Last year, Caterpillar had sales of just over $20 billion. At the top end of Caterpillar's guidance full year revenue would climb $806 million. So, Caterpillar has already fulfilled its mid-point growth forecast for the year. Simple math shows that earnings are likely to be down for the remainder of the year. Last year, the company earned $2.30 per share. This year, it is forecasting a range of $2.20 to $2.30 and first quarter earnings are already higher by $0.15.

While Pier One announced lower SG&A costs, it noted increases in all insurance and employee benefit related expenses. Same store sales growth was 0.9% for the quarter ending March 31, 2003, with March same store sales falling 5.8%. It expects same store sales to fall 4% to 8% for the current quarter. Total sales are expected to increase 1% to 5% due to new stores. Pier One has also participating in the latest retail trend of offering proprietary credit cards. Sales on its card make up 26% of purchases, with the average ticket being $153, or three times the average ticket for other forms of payment. What is not broken out is how much return business in done on the cards. Often retailers offer perks, 10% of total purchase, when customers sign up for the credit card.

Maytag, the third-largest appliance maker, was income and sales decline in the quarter. Net income fell almost 40%, while sales fell a more modest 3%. In order to help improve profitability, Maytag is reducing its workforce by 500 workers, or about 8% of its salaried staff.

United Healthcare expressed concern that it could lose members as companies continue to reduce their workforce. Additionally, the leading health insurer, predicts medical costs to rise 11% to 12%

I thought it was interesting that Polaris, the largest U.S. manufacturer of ATV, is financing 34% of product sold to customers, up from 14% last year. Everyone is getting into the finance game. Polaris also noted that the promotional activity is "heavier now than it has been."

Coca-Cola surprised analysts with volume growth of only 4% during the first quarter. Coke blamed the weak volume growth on the global economy and the downturn in restaurants and hotels because of the war in Iraq.

On Tuesday night, there was a flurry of technology companies reporting earnings, with Intel and Microsoft dominating the earnings news. Both companies beat expectations, but while Intel raised guidance for the next quarter, Microsoft quelled optimism by lowering forecasts for next year. Most, if not all, of Intel's better than expected earnings came from selling about $150 million worth of inventory that had previously been written off. Plus the strength is not industry wide as Intel's main competitor, AMD, saw sales decline over 20% for the quarter.

Motorola is cutting another 3,000 workers. Motorola also cut its estimates for mobile phones sales to 430 mm units from 440 mm. And as the announcer from the movie Major League would say this is, "just a bit outside" from the forecast put forward by the industry in 2000 of 1 billion units.

Accenture reported earnings on Monday, proving that the technology rebound is evasive. Bookings were down 27% year-over-year. Accenture failed to give booking guidance, but said booking in March and April were about $1 billion each. This run rate is insufficient to meet the $16 billion in new bookings achieved in 2002. Accenture said that its government sales increased 12%, far about the other groups. It continues to see depressed IT spending going forward, with revenue being flat with last year to up 2%.

Unisys' conference call yielded some interesting insight to what is driving the economy. It said that the U.S. was its strongest market due to the strength in the U.S. Federal Government business. Also mentioned during the call were contract wins or extensions from the Department of Agriculture, U.S. Coast Guard, city of Minneapolis, city of Chicago, State of West Virginia, State of Pennsylvania, and the Transportation Security Administration.

A company must feel like it is in the wrong business when its losses are close to its revenues. Chartered Semiconductor today reported a loss of $76 million on revenues of $104 million. Unfortunately, it does not expect business to get much better. Second quarter revenues are expected to increase to $117 million, along with a loss of $102 million.

Also in tech land, Sun Microsystems reported sales for its third-quarter (period ending March 31) fell 10%, the eighth consecutive decline.

It will be very difficult for the economy to mount a meaningful, long-term recovery as companies continue to pare workers. Investors want to see profits, and the only way companies can deliver earnings growth is through cost cutting. At some point companies will run out of areas to cut cost. If the underlying economy has not rebounded by then earnings could come under more pressure. Ironically, by instituting all the cost cutting, companies are almost guaranteeing that the overall economy remains weak.


 

Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis
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