Apple, Dow Drive U.S. Fourth-Quarter Profits to 19-Year High

U.S. corporations are set to report their most profitable fourth quarter on record as companies from Apple Inc. to Dow Chemical Co. feed the demand for iPads, caustic soda and capital goods that’s bolstering the economy.

Earnings per share for all Standard & Poor’s 500 Index companies are expected to have risen about 20 percent to $22.05 for the three months ended Dec. 31, according to analysts’ estimates compiled by Bloomberg. Profits excluding the financial industry may have climbed 12 percent, forecasts indicate.

Investors are more confident that the economic rebound will be sustained and companies will be able to raise prices and control costs, said John Carey, who helps manage about $55 billion of U.S. securities for Pioneer Investment Management in Boston. Manufacturing expanded in December at the fastest pace in seven months, and service industries rose the most since May 2006, according to Institute for Supply Management indexes.

“The momentum of recovery is pretty well in place at this point,” Carey said in a telephone interview.

Technology and industrial companies paved the way for what may have been the strongest year for U.S. profits since 2007 and the best fourth quarter since Bloomberg began keeping the data in 1992. S&P 500 companies have already exceeded the average analyst profit estimate for six straight quarters, the longest streak in Bloomberg data going back to 1993.

The S&P 500 gained 13 percent in 2010, its second straight annual gain since the stock market collapse in 2008.

Caterpillar, GE

The recovery probably boosted seven of the eight biggest U.S. airlines in the fourth quarter, more than tripled profit at Caterpillar Inc. and gave General Electric Co. its third- straight gain, estimates indicate. Some of the biggest U.S. banks also are expected to report higher earnings, starting with New York-based JPMorgan Chase & Co. on Jan. 14.

Alcoa Inc., the biggest U.S. aluminum producer, will be the first member of the Dow Jones Industrial Average to report fourth-quarter earnings, scheduled for Jan. 10 after the market closes. Higher aluminum prices may help New York-based Alcoa post profit of 18 cents a share, the average of 14 analysts’ estimates, after reporting a loss a year earlier.

Dow Chemical, the world’s second-largest chemical company, may post profit of 35 cents before some items, the average of 13 estimates, up from 21 cents a year earlier. Gains will be driven by higher prices for caustic soda and sales of products used in automobile parts and foam cushioning, said David Begleiter, a New York-based analyst at Deutsche Bank AG.

Industrial demand in the U.S. is beginning to show in company earnings, adding to “the sexy part” of growth from overseas operations and exports, said Brian Belski, chief investment strategist at Oppenheimer & Co. in New York.

Consumers Roar Back

“I think 2011 will be the year of more domestic growth,” Belski said. “Clearly the consumer has come roaring back.”

Apple’s net income in its fiscal first quarter ended in December rose 47 percent to $4.97 billion, or $5.34 a share, according to the average of estimates. Sales for iPhones, iPads and Mac computers improved during the holiday season, said Michael Yoshikami, chief investment strategist at Walnut Creek, California-based YCMNet, which owns Apple shares.

Earnings growth for S&P 500 companies is settling to normal rates after soaring as much as 40 percent in the second quarter and 25 percent in the third because of comparisons with depressed profits in the same periods of 2009, said Thomas Lee, chief U.S. equity strategist with JPMorgan in New York.

“We know GDP growth accelerated in the quarter and we know consumer spending accelerated,” Lee said. “It is pointing to a real nice improvement in S&P earnings in the fourth quarter.”

U.S. Bank Earnings

The U.S. economy probably expanded 2.5 percent in the fourth quarter, compared with 2.6 percent in the previous period, according to the average of 66 economist estimates compiled by Bloomberg. At least 19 of those economists expect growth in gross domestic product to accelerate.

Europe is being led by the services and manufacturing industries in Germany, the region’s largest economy. Earnings of Stoxx Europe 600 Index companies probably increased about 17 percent in the fourth quarter, led by chemical and oil companies, according to analysts’ estimates.

Wall Street firms such as Goldman Sachs Group Inc. benefited from an end-of-year jump in equity underwriting and higher volume in stock and bond trading, Bloomberg data show. Fallout from the U.S. housing crisis waned, letting lenders set aside less money for soured loans.

“Earnings are definitely going to go up,” said Paul Miller, an analyst with Arlington, Virginia-based FBR Capital Markets and a former examiner for the Federal Reserve Bank of Philadelphia. “Housing is still going to remain a thorn in their side, but overall provisions are going to go down.”

‘Disappointment on Horizon’

Sustaining the pace of earnings growth may be challenged in 2011 by rising costs for metals, energy and expanding workforces, said Jack Ablin, who helps manage $55 billion as chief investment officer for Chicago-based Harris Private Bank. Analysts’ profit estimates this year are too rosy, he said.

“I’m seeing a disappointment on the horizon,” Ablin said. “They are calling for margins to expand to the point of margins being higher than during the peak of 2007. I don’t want to bank my investment assumptions on that.”

Construction so far has been left out of the recovery, as spending dropped 6 percent in the 12 months through November. USG Corp., the largest U.S. maker of gypsum wallboard, is expected by analysts to post its 13th straight quarterly loss.

S&P 500 companies selling household and personal products probably had a profit decline of 2.2 percent, while health care- equipment and services companies dropped 4.7 percent from a year ago, based on earnings estimates.

Health Care’s Sensitivity

Sales at health-care companies were hampered as the U.S. unemployment rate remained above 9.5 percent, leaving many people without insurance, said Les Funtleyder, a portfolio manager at Miller Tabak & Co. in New York. Earnings at pharmaceutical companies may have risen 4.7 percent as Pfizer Inc. and Merck & Co. eliminated jobs and closed plants.

“It’s going to be a story of slow to decelerating revenue, and cost-cutting and share buybacks to make the bottom line,” Funtleyder said. “Health care’s sensitivity to the economy last year surprised a lot of people, and that includes pharma.”

Pfizer, based in New York, may post a decline in profit excluding one-time items to 46 cents a share from 49 cents a year earlier, estimates indicate. Merck, of Whitehouse Station, New Jersey, may report a rise to 83 cents from 79 cents.

General Electric, the world’s biggest maker of power-plant equipment, jet engines and locomotives, may post net income of 32 cents a share, based on the average of eight analysts’ estimates. That would compare with 28 cents a year earlier.

“We’ll deliver good earnings in ’10, ’11, ’12,” Chief Executive Officer Jeffrey Immelt told investors at a meeting in New York last month. “We’ll have a good fourth quarter.”

‘Real Focus’

Caterpillar, the world’s largest maker of construction and mining equipment, may report profit of $1.26 a share, more than triple a year earlier, as orders began to rise in North America and Europe and emerging-market demand remained strong.

“People will be optimistic on the top line,” said Stephen Volkmann, an analyst for Jefferies & Co. in New York who has a “buy” rating on Caterpillar shares. “The real focus will be on incremental margins.”

The largest U.S. airlines will have their first collective annual profit since 2007, fueled by a return of business travelers and a tighter supply of available seats.

“Revenues are definitely the key reason that they are doing as well as they are,” said James M. Higgins, an analyst at Soleil Securities Corp. in New York. “Revenues are driven in large part by improving demand and capacity discipline.”

Disney, Auto Sales

Delta Air Lines Inc., the second-largest U.S. carrier, may report profit of 26 cents a share, compared with a loss a year earlier, according to analysts’ estimates. AMR Corp., the parent of No. 3 American Airlines, will be the only one of the eight largest U.S. carriers to post a loss, forecasts indicate.

Capacity crowds at Walt Disney Co. theme parks point to consumers who are willing to spend more on entertainment, said David Joyce, a Miller Tabak analyst in New York. Disney, based in Burbank, California, will report a rise in fiscal first- quarter net income to $1.06 billion, estimates show.

“With the consumer having repaired their personal balance sheets somewhat in the past year or so, there is a healthy degree of pent-up demand to be entertained, have fun, and go on vacations,” Joyce said.

U.S. vehicle sales recovered to a 12.6 million seasonally adjusted annual rate in December from a low of 9.4 million in September 2009, according to Woodcliff Lake, New Jersey-based researcher Autodata Corp. Ford Motor Co., driven by sales of models such as the Fiesta subcompact and F-150 pickup, may post profit of 47 cents a share, the average estimate. That would be a gain from a year earlier of 45 cents excluding some items.

Economic Importance

David Bianco, chief U.S. equity strategist in New York for Bank of America Corp., said investors shouldn’t focus too much on consumer spending. Discretionary consumer spending makes up 20 percent of the economy and less than 15 percent of the S&P 500, said Bianco, who raised his 12-month target for the S&P 500 to 1,400 from 1,350 on Dec. 2. The index closed at 1,273.85 yesterday.

“The consumer is just overstated in terms of the importance to the economy and dramatically so when it comes to the S&P,” he said. “It’s really about business spending and commodity prices and demand.”

Oil producers benefited from rising crude and gasoline prices, which made up for exploration delays in the Gulf of Mexico after BP Plc’s fatal rig disaster. Profit for Exxon Mobil Corp., the world’s biggest company by market value, probably rose to $1.57 a share, according to analysts, from $1.27.

Raising Dividends

Investors will share in the higher corporate earnings through an estimated increase of S&P 500 dividends to $38 a share in 2012 from $25 now, Bianco said. S&P 500 companies have amassed $2.47 trillion of cash and short-term investments, according to the most recent data compiled by Bloomberg.

“The earnings and free cash flow are so good at these companies that they’re still going to have to figure out what to do with this surplus free cash flow,” he said. “My view is that they’re going to raise their dividends.”

To contact the reporter on this story: Thomas Black at tblack@bloomberg.net.

To contact the editor responsible for this story: Kevin Miller at kmiller@bloomberg.net.

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