Earnings Preview for Three Big Companies

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Recently I had the opportunity to attend the CFA Society of South Florida’s financial forecast event for 2013. A highlight of the event was listening to economists Rich Yamarone of Bloomberg and Don Rissmiller of Strategas speak about the health of our nation’s economy. Yamarone stated that the economy is extremely weak, and teetering on recession. He believes the largest problem for the country is lower income growth, with real incomes flatting and poised to decline. Both men agreed that too many jobs in the employment recovery picture are restaurant, retail, and temporary workers.

Despite the gloomy outlook, the companies I’m featuring in this earnings preview are more levered to a global economy. Here’s what I expect to hear from General Electric, Morgan Stanley, and Schlumberger on Friday.

General Electric (NYSE: GE)
Friday, Jan. 18 before open; Consensus $0.43 EPS / Revenue $38.74B

Shareholders of the industrial conglomerate earned more than a 20 percent total return during calendar 2012, as General Electric rose from under $15 and reached a three-year high of $23 in early October. While GE has numerous lines of business, most agree that an improved industrial outlook will be the key to the company’s future earnings growth. Volatility is low heading into Friday’s earnings release, as investors received an update from corporate management on Dec. 17 at GE’s annual outlook investor meeting.

On Dec. 21, General Electric announced it would be acquiring the aerospace parts business of Italian firm Avio for $4.3 billion. Analysts note the price paid for the privately-held Avio unit is comparable with the current market valuation of publicly-traded component suppliers, such as Meggitt PLC. General Electric has a market capitalization of more than $220 billion.

January is a great time of year to attract corporate managers to South Florida, and the local CFA Society will be hosting General Electric management on Tuesday, Jan. 22 and Wednesday, Jan. 23 for the 9th annual event with the firm. I am planning to attend the meetings and look forward to writing about GE’s plans for 2013 and beyond. Check back at johnmacris.com after Jan. 23 for additional insights on General Electric.

Morgan Stanley (NYSE: MS)
Friday, Jan. 18 before open; Consensus $0.26 EPS / Revenue $7.02B

It’s a new calendar year, which means it’s time for an annual stress test at our nation’s largest financial institutions. The 19 largest U.S. banks, including Morgan Stanley, were required to submit the results of their November test scenarios to the Federal Reserve no later than Monday, Jan. 14.

For the upcoming fourth quarter release, analysts expect improved investment banking activity at Morgan Stanley to drive earnings results. Completed M&A volume increased 20 percent quarter-over-quarter for the industry, according to data from analytics firm Dealogic. Relative strength within investment banking is expected to be offset by an unfavorable sales and trading environment within fixed income, currencies, and commodities.

Looking ahead to 2013, there have been a several changes in analyst opinions within the last week. On the bull side, CLSA raised its price target on Morgan Stanley from $23 to $27. The Asian research firm believes Morgan Stanley is the least expensive bank based on franchise value, and that management will improve return on equity by decreasing the size of its fixed income business. I stated above that fixed income is expected to be a weak area for Friday’s fourth quarter 2012 results. CLSA is short for Credit Lyonnais Securities Asia.

On the bear side, the Atlanta, Georgia-based SunTrust downgraded Morgan Stanley to Reduce from Neutral. SunTrust states that consensus estimates for Friday are too high, and that a disappointment could result in reduced 2013-2014 estimates. I recommend that readers take a “wait and see” approach until after the quarter. Based on the reaction to Thursday’s earnings releases at Bank of America and Citigroup, I believe the market will likely sell on the news, sending shares of Morgan Stanley lower.

In other news, a recent Bloomberg article from Jan. 15 states that President Obama is actively considering Morgan Stanley CFO Ruth Porat for deputy Treasury Secretary, the No. 2 position at the department. An announcement could be made as soon as Friday’s conference call.

Schlumberger (NYSE: SLB)
Friday, Jan. 18 before open; Consensus $1.08 EPS / Revenue $10.83B

On Dec.14, Schlumberger issued a fourth quarter 2012 operational update, forecasting a reduction of $0.05 to $0.07 in fourth quarter earnings per share on the basis that business activity is weaker than expected. The company provides products and services for fossil fuel exploration.

Schlumberger fell beneath the $68 level on the news, but the stock has since recovered and currently exchanges hands for more than $73 per share. The recovery in share price has taken place despite a negative pre-announcement from Baker Hughes (NYSE: BHI), which also operates in oil and gas. Investment research firm ISI Group stated the Baker Hughes pre-announcement was “pretty ugly” and decreased North America business at BHI could negatively affect the sector, including Schlumberger.

On Jan. 14, Global Hunter Securities downgraded Schlumberger based on valuation to Neutral from Accumulate. Global Hunter is headquartered in New Orleans, Louisiana and dedicates its coverage to natural resources-related sectors. Similar to the scenario discussed above for Morgan Stanley, I recommend that readers take a “wait and see” approach for both Schlumberger and Baker Hughes, as the analysts who are positive on oil and gas are forecasting a multi-year growth story in 2013-2014. Any weakness in SLB and BHI following earnings will present better entry points for long-term investors.

Baker Hughes is scheduled to release fourth quarter results ($0.62 EPS / revenue $5.21 billion) on Wednesday, Jan. 23 before the opening bell.

Economic Data for Friday, Jan. 18

On the economic front, Thomson Reuters and the University of Michigan will release their preliminary monthly “surveys of consumers” on Friday at 9:55 a.m. The final version of the monthly survey will be released in two weeks time on Friday, Feb. 1. For the previous month, consumer confidence fell sharply over concerns related to political gridlock and the fiscal cliff.

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