Earnings: What To Listen For

This time out, revenue growth will have more impact than cost-cutting on stock prices.

As companies report third-quarter earnings in coming weeks, you'll see big gains, perhaps as much as 20% higher than a year ago, according to Thomson First Call. Confidence is high because fewer companies than usual have put out the dreaded warnings that they'll come up short. About 85% of companies will report earnings that meet or beat estimates, says Nick Raich, research director at Zacks Investment Research.

That's one reason the stock market has climbed so much this year, with the Standard & Poor's 500-stock index gaining 18% and the NASDAQ 42% through Oct. 6. But it is also the reason this earnings season will be less about looking at a chief executive's numbers than about reading lips. Can the CEO describe a revenue stream strong enough to keep earnings growing in the fourth quarter? Are the comments about 2004 positive enough to keep the stock aloft? "The stocks are going to be trading off of what they say about the fourth quarter and 2004," says Raich.

Pay particular attention to comments in press releases and investor conferences about top-line growth. Companies have achieved much of their earnings rebound to date by cutting expenses. To keep the earnings momentum, they will need additional business as well. That's particularly true among S&P 500 technology stocks, where analysts expect earnings to be up 30% in the fourth quarter and 31% in 2004. Listen closely for clues about a company's operating leverage. That's what will be needed to turn incremental revenues into bigger profits, says Pip Coburn, global technology stock analyst at banking giant UBS (UBS ).


Tech stocks are the most likely to make the big moves. Besides the stocks being among the most volatile in the market, the companies have some of the highest five-year projected earnings growth rates (14%) and the most vulnerably high price-earnings ratios, around 28 times earnings for the next four quarters. Many will be all ears for Intel's conference call on Oct. 14. Analysts are forecasting a 37% profit gain for the chipmaker in 2004, and traders will be listening for comments to support that number.

The next day, IBM (IBM ) is expected to weigh in, and those results could well move the stocks of its competitors, including hardware maker Hewlett-Packard (HPQ ), Web-infrastructure company BEA Systems (BEAS ), and tech-service companies Accenture (ACN ), Computer Sciences (CSC ), and Electronic Data Systems (EDS ). On Oct. 23, Microsoft (MSFT ) will Webcast its earnings call after the markets have closed -- and that always has ramifications for tech stocks.


While tech stocks account for 18% of the value of the S&P 500, the financial sector has the biggest weighting at 21%. On Oct. 14, Bank of America will be among the first banks to report. It could provide early clues to profit trends at other banks. J.P. Morgan Chase (JPM ), U.S. Bancorp (USB ), Wachovia (WB ), and credit-card company MBNA (KRB ) are expected to report over the next week. Anything they say about the financial health of consumers who have helped carry the economy could be of interest. Pay attention, too, to the impact of rising long-term interest rates on profits. That will be important as rates continue to rise.


Consumer stocks heavily influenced by economic cycles, such as auto makers, media companies, and retailers, make up 11% of the S&P 500. General Motors (GM ) reports Oct. 15 and Ford Motor (F ) the day after. They should provide additional insight into consumer spending and an update on pension funding problems affecting older industrial companies. AOL Time Warner's (TWX ) report, expected Oct. 22, will be scrutinized carefully for clues to see if it can deliver the 17% earnings growth in 2004 that Wall Street expects. Most retailers won't be reporting until November.

By David Henry

Before it's here, it's on the Bloomberg Terminal.