Predictions for Earnings Season
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tis the season to beat guidance.....
Every 3 months Wall Street goes through another season of earnings releases. We sit down, listen to earnings conference calls, and see if corporate can beat Wall Street. A lot of volatility and big stock swings go on, and overall it is rather exciting. In the spirit of guestimating earnings releases, here are my predictions for this season of releases....
On your mark, get set, go!
Alcoa (NYSE: AA) starts us off, presumably releasing earnings on October 9, 3 months after its last earnings release on July 9. Alcoa is engaged in making aluminum and aluminum products, and can be an indicator of where the economy is going as it supplies numerous important industries, such as automobiles, aircraft, oil and gas, and construction. Some positive things Alcoa can look forward to is a rebound in US auto sales and in the housing market. Auto sales continue to climb higher and higher, even as the economy grows at a snail’s pace. So far US auto sales are coming in at a 14.52 million annualized rate, which is much higher than the 12.8 million cars sold in 2011 (in the US). Engineered products, which count for 25.7% of its revenue and 36.2% of its cash flow, this includes the automobile and construction business. Housing prices could potentially have bottomed, as some economists have alluded to, and we could see more investment in construction. So far in the S&P/Case-Shiller index, home prices are up 1.2% year over year this July versus last. According to CoreLogic, that rise in home prices has pushed 1.3 million homeowners out of being underwater. That will help push America along and increase investment by home builders. Also emerging markets like Indonesia and Nigeria are stepping up infrastructure investments that will help out this division. The negatives for Alcoa are worrisome, a slowdown in China and India's economy, a drop-off in growth in Brazil, and a recession burdened Europe. Alcoa's earnings are largely based on macro-economic trends that it has no control over. Also a switch from soda cans to "healthier" drinks is also a problem.
Quantitative easing will help push aluminum prices higher, if you look at the graph above you can see how prices rallied going into QE 2. At the very end of the graph prices are rallying again on QE 3 (or QE-infinity). My prediction is that earnings come in as expected at $0.02 EPS as strong automobile sales and housing data outweigh problems in Europe and a global growth slowdown for this quarter.
Another prediction I have is that Ford (NYSE: F) and General (NYSE: GM) will do better than expected because of a strong US auto market. Back in 2011 Ford predicted that US auto sales would come in around 13.5 million to 14.5 million, yet right now annualized sales for cars in the US is above that (Autodata puts the annualized rate at 14.52 million cars). Because auto sales are coming in at the higher range of Ford and GM's estimates, I don't see why they can't beat expectations. The US market is one of the few profitable auto markets around, so strong domestic sales mean everything for the "Big 3" Detroit auto companies. Plus continuous cheap credit will enable consumers to buy cars with little to no interest, which will spur demand. Everyone is worried that Europe will eat away all of these companies’ profits, but the real story here is what is going on in America. If America is doing fine automobile wise, then GM and Ford will be able to ride out the headwinds in Europe. The US is where most if not all of the profits Ford and GM are making right now, so if they can scale down in Europe like they have been doing and are continuing to do so, they will see higher profit margins and more profits. Ford had a long string of quarterly misses, 5 in a row in fact, but its last 2 earnings beat expectations. GM has missed expectations only once out of its 7 last earnings releases.
My final prediction has to do with Activision Blizzard (NASDAQ: ATVI). I think that by the end of 2012 they will have over 10 million subscribers for WoW again. In the past 2 years WoW's sub count has plummeted. From June 30, 2011 to June 30, 2012, WoW lost 2 million subs. Now they have 9.1 million. That is brutal, considering WoW makes up about 50% of ATVI's profits. But ATVI recently released a new expansion pack for WoW called the Mists of Pandaria. Historically speaking there is a bump up in subs after a launch of an expansion pack, so investors are wondering whether or not that will happen this time. I think it will, because this time around ATVI decided to release the new expansion pack in the Asian markets (September 27 and October 2) right after it launched in the western markets (September 25). In the past few launches Asia had to wait several weeks to months to get the new content. Earlier in the year management noted that sub losses were worse in Asia than in the western markets, so this shows us that they have wised up and are shifting their focus to new markets. China's government approved of WoW, so that major hurdle is already behind them. Analysts are saying that lackluster retail sales (650,000) of Mists are going to hurt ATVI, but Diablo 3 sold 1 million copies online with a 12 month WoW subscription. Having played WoW myself I can say that more players will buy it online than go out to a store and buy it because it makes no sense to leave your house for something you could easily do online. Most WoW subs already have their credit card hooked up to WoW, and buying it online allows you do easily download it to your PC or Mac from the comfort of your own home. I think that because those sales estimates don't take into account online sales, over the next several quarters ATVI will surprise investors.
These are just my guestimations of what to expect this earnings season and going forward into 2013. With Wall Street constantly throwing out new guidance’s and earnings estimates, I thought I might as well throw in my 2 cents. We can't all accurately predict market gyrations with our stocks, but we can guestimate what to expect.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Ford. Motley Fool newsletter services recommend Activision Blizzard, Ford, and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.