Q1 earnings deserves a fitting burial, and maybe even a few words of praise

Before we start to focus on Q2, Q1 earnings deserves a fitting burial, and maybe even a few words of praise.

Briefly the bad news that grabbed the headlines resulted in the second consecutive quarter of negative earnings for the Financials. Over the past six months the sector has reported a combined loss of $28 billion, compared to the prior years’ profit of $114 billion - that’s $142 billion shift in earnings, good thing we’re in a low P/E environment.

The words of praise are for the non-financials. Their earnings were up 8.8% for Q1, and while substantially down from their 12.2% gain of Q4, they remain impressively better than the overall indices’ 26% decline. That Q4 growth, along with strong hope for international sales, produced high expectations for the non-Financials for Q1, to which over 60% of them missed their estimate. Maybe we were being greedy in the estimates, but the reality sure seems nice now. Over half of the issues reported at least a 10% gain on a year-over-year basis and the market appreciated it, with those stocks averaging an 11.8% gain since the end of the first quarter. There was also good news in the lack of bad news. The concern of any wholesale spreading of write-offs, layoffs or messages of impending doom didn’t materialize outside of the Financial and Consumer Discretionary sectors.

So that leads us up to Q2. Since the estimates over the last year on the Financials now appear to have little resemblance to the results, I’ll stick with the non-Financials. Those issues are expected to post a 10.8% gain, compared to the 48% decline for the Financials (that I’m not mentioning). IT and Utilities are expected to post strong double-digit earnings growth, with Energy posting a 13% gain and accounting for 24% of the earnings. Overall, given the liquidity concerns, employment, oil and the cost of almost all foods, a rosy prediction, and when combined with ‘hope and prayer’ that we are near the bottom of the liquidity problems, helps explain the recent price rally.

Q3 is when we start to see the gains. Considering the comparisons to Q3 2007, when earnings were down over 9%, the 16% growth is not that great, so the quarter is labeled a building period. Q4,’08 and Q1,’09 is expected to show large gains (get the headlines ready), but again due more to the poor comparisons and the belief that there will be no more mega-billion dollar charges. If the earnings are not good it will be a reflection of the economy and we’ll most likely have much larger problems to deal with - such as unemployment, a renewed liquidity drought, oil or food prices, rapid inflation, or maybe even another recount scenario - hang in there chad.

Q1 Operating earnings: 48.1% beat their estimate and 41.5% did not -> historically over 60% beat their estimates 57.5% beat last years value, 41.0% did not 23.9% of Financials posted earnings gains; 65.2% of non-Financials did 53.3% of the non-Financials posted at least a 10% earnings gain

Q1 2008 posted a -25.9% decline over Q1 2007 Ex/Financials the index posted an 8.66% gain (Q4 2007 was -30.8% and +12.2% for non-Financials) There was no major negative news or expansion of charges outside of the Financial or Consumer Discretionary sectors; optimism lives

Earnings Shift: Q1 2008 23.2% came from Energy and -3.3% from Financials Q1 2007 13.6% came from Energy and 29.7% from Financials For Q4,’07 and Q1,’08 the Financial sector has lost $28 billion, compared to the prior years’ profit of $114 billion - that’s $142 billion shift in earnings, which resulted in a $617 market decline (from 9/07)

The 216 non-Financials that posted at least a 10% earnings gain have averaged an 11.8% gain since the end of the first quarter, with 116 of them increasing at least 10%

12-Mo Mar,’08 P/Es are much higher than forward numbers due to expected growth; index at 18.6 (12.9 for ‘09), Financials at 30.6 (10.3)

Q2 2007 posted the highest earnings, so comparisons are set high Q2 2008 is expected to post a 5.4% decline, with the Financials down 47.7% and non-Financials expected to post a 10.8% gain, which would translate into four consecutive quarters of negative growth and three consecutive quarters where non-Financials posted positive growth Energy is expected to contribute 24% of the earnings for Q2; it is now 14.2% of the index - it’s highest under the GICS sectors (from 1989)

2008 estimated to increase 8.4%, but is due to poor 2007 and Energy’s increased contribution 2009 estimated to increase 23.5%, but estimates lack charges, 2008 has declined and there could be gains due to reversals of prior charges

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