The Economy and Earnings in the Week Ahead
October 01, 2012

Week Ahead for the Economy: Focus On September Jobs Report!

by Ian Harvey

The Key Events in the Week Ahead

September 29, 2012

Introduction

Economic reports dominate the news flow this week, with the September non-farm payroll report coming out on Friday as the most significant. The tepid pace of jobs improvement has been a persistent source of frustration for investors. But the loss of momentum in the manufacturing sector in recent months has added to those worries. The two ISM surveys on deck this week will give a good sense of where the factory and service sectors stood.

These factors may provide plenty of excuses to take profits in the week ahead, beginning with Monday’s ISM manufacturing data, again expected to show weakness in the sector.

Manufacturing reports from China, over the weekend, and from Europe, also Monday, will provide a look at just how sluggish global activity has become.

Friday’s jobs report is expected to show the low level of job creation continued in September, after Augusts’ 96,000 nonfarm payrolls.

The U.S. election is also a focus in the week ahead, with the first presidential debate in the tight race Wednesday evening.

Earnings in the Week Ahead

There is a total of 16 companies reporting results this week, including five S&P 500 companies. Expectations for the third quarter remain quite low, with total earnings expected to drop 3% from the same period last year. This growth expectation reflects a 2.4% drop in total revenues and a 10-basis point expansion in net margins.

The actual growth rates will most likely be better than these pre-season expectations, given how company managements have refined the art of under-promising and over-delivering quarter after quarter. Just to give you an idea of how good they are at anchoring expectations, roughly two-thirds of the companies in the S&P 500 would typically beat earnings expectations in any given quarter – it was 62% in the second quarter and 65% in the first quarter.

If we do get negative earnings growth this quarter as currently expected, that will be the first decline in quarterly earnings since the earnings recovery got underway after the end of the Great Recession in 2009. The earnings weakness is quite broad-based, with half of the sectors expected to have negative earnings growth.

As was the case in the second quarter, the Energy and Basic Material sectors are the weakest, with earnings declines of 24.9% and 22.3%, respectively. Energy and Basic Materials earnings were down 16% and 20.5% respectively in the second quarter, when total earnings for the S&P 500 as a whole were up 4%.

Only two sectors are expected to have double-digit earnings growth – Finance (up 15.5%) and Construction (up 42.3%). Construction doesn’t carry much weight in the aggregate picture as it contributes less than 0.5% of total S&P 500 earnings, but the Finance strength is making the aggregate growth rate look a lot better than it otherwise would be. Excluding Finance, total S&P 500 earnings in the third quarter would be down 6.6%.

Company Earnings in the Week Ahead

Tuesday, October 02

On Tuesday, apparel maker PVH (PVH) will host an analyst meeting. In the past, CEO Manny Chirico has used these events to report better-than-expected numbers. In recent interviews Chirico has been optimistic, so the positive tones will probably continue.

Fertilizer maker Mosaic (MOS) is slated to report earnings before Tuesday’s opening bell. The “agriculture trade is alive and well,” and with natural gas being a key cost input for fertilizer, so Mosaic could benefit from the current low price of natural gas. At current levels, Mosaic’s stock is cheap, too.

Wednesday, October 03

Monsanto (MON), the St. Louis, Mo.-based company will deliver earnings Wednesday.

Even though MON makes seeds, it trades as if it’s a biotech company -- note that based on its price-to-earnings multiple, Monsanto is more expensive than Celgene (CELG) or Gilead Sciences (GILD) right now. Monsanto’s an innovator and the company has patents on seeds that are worth fortunes!

Meanwhile, Family Dollar Stores (FDO) is also scheduled to report earnings Wednesday. This stock has lagged its dollar store peers. FDO is the stock analysts “love to hate” – but a bullish attitude remains.

After the close, hotel operator Marriott International (MAR) will announce its earnings results. The Bethesda, Md.-based company recently caught a downgrade from JPMorgan, which is troubling as the downgrade was so close to the quarter!

IPOs Slated for the Week Ahead

The market may still be cautious when it comes to the IPO market. After all, Facebook, Inc. (NASDAQ: FB), Groupon Inc. (NASDAQ: GRPN), and Zynga, Inc. (NASDAQ: ZNGA) have all proven to be disasters. Still, there are two real companies coming public in the week ahead that actually generate sales that are easy to tabulate and easy to understand.

These two IPOs are Lifelock Inc. under the “LOCK” stock ticker, and Dave & Buster’s Entertainment Inc. under the “PLAY” stock ticker. Lifelock is an identity protection solution that is sold on a subscription basis direct to consumers. Dave & Buster’s is a giant arcade game destination for adults and children with a restaurant and bar to boot.

Lifelock is expected to offer about 15.7 million shares in a price range of $9.50 to $11.50 in a deal underwritten by BofA/Merrill Lynch, Deutsche Bank, and Goldman Sachs. At the mid-point of the range this is expected to have a market cap of less than $900 million, but that may change as the mid-week IPO gets closer and as the order book fills up. Venture backers include Bessemer Ventures (23.8%), Kleiner Perkins Caufield & Byers (11.8%) and Industry Ventures (10.3%), and key stakes are held by Goldman Sachs Group Inc. (NYSE: GS) at 11.2% and Symantec Corp. (NASDAQ: SYMC) at 8.3%.

Dave & Buster’s is expected to offer almost 7.7 million shares in a price range of $12 to $14 per share in a deal underwritten by Goldman Sachs, Jefferies & Co., and Piper Jaffray. Be advised that this is a private equity-backed IPO as the entertainment venue was taken private in 2006 by Wellspring and HBK. The company said, “We intend to use the net proceeds from this offering to reduce our aggregate indebtedness by approximately $80.0 million, as well as to pay related premiums, interest and expenses. After applying the proceeds from this offering, our aggregate indebtedness will be approximately $384.8 million on an as adjusted basis as of July 29, 2012.”


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Economy in the Week Ahead

This week’s news for the economy may shed more light on the economy. The PMI Manufacturing Index and ISM Manufacturing Index are both out on Monday, along with construction spending.

Wednesday we get a preliminary reading on the jobs outlook with the ADP Employment report, as well as the ISM Non-Manufacturing report. Thursday brings jobless claims and factory orders, followed Friday by the monthly jobs report.

The September jobs report is due in the week ahead and the numbers could play an important role in the upcoming presidential election.

Jobs are undoubtedly the central theme of this campaign. President Barack Obama, if he expects to win re-election, has to convince voters that his policies are addressing the causes of a stubbornly high unemployment rate (8.1% in August). A lousy jobs report just a month before the Nov. 6 election won’t be helpful.

Former Massachusetts Gov. Mitt Romney, the Republican candidate, has argued that Obama’s policies on the economy have failed and that the recovery should be much farther along nearly four years removed from the financial crisis brought on by the collapse of the U.S. housing market.

Both campaigns will certainly attempt to spin the job numbers in their favor when they are released on Friday.

Also, the ECB and BOJ are set to meet on Thursday, with the Bank of Japan's meeting extending until Friday.

Here is a brief list of some of the key events for the economy and earnings in the week ahead.

All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

Earnings: FerrellGas Partners (FGP)

Economy:

• 10.00 am ISM manufacturing
• 10.00 am Construction spending
• 12.00 pm San Francisco Fed President John Williams makes opening remarks comments at capital markets conference
• 12.30 pm Fed Chairman Ben Bernanke speaks on economy, takes questions at Indiana Economics Club

Tuesday

Earnings: Mosaic (MOS), PVH (PVH), Acuity Brands (AYI)

Economy:

• September vehicle sales

Wednesday

Earnings:Family Dollar (FDO), Monsanto (MON), Marriott (MAR)

Economy:

• 8.15 am ADP employment
• 10.00 am ISM nonmanufacturing
• 2.00 pm FOMC minutes
• 7.45 pm St. Louis Fed President James Bullard on monetary policy
• First presidential debate

Thursday

Earnings: International Speedway (ISCA)

Economy:

• Chain stores September sales
• 8.30 am Initial claims
• 10.00 am Factory orders

Friday

Earnings: Constellation Brands (STZ)

Economy:

• 8.30 am Employment report
• 1.00 pm Fed Gov. Elizabeth Duke on real estate at New York Fed
• 3.00 pm Consumer credit





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