Across numerous sectors, companies are expecting better quarterly profits
It looks to be the 16th straight quarter of double-digit profits
NEW YORK » What do DuPont Co., Dick's Sporting Goods Inc. and World Wrestling Entertainment Inc. have in common?
These disparate companies, along with many others, are looking forward to surprisingly good first-quarter profits.
Across numerous sectors, the past few weeks have seen companies putting Wall Street on notice that earnings are going to be better, not worse, than expected.
"Right now, we're looking at the 16th straight quarter of double-digit profits," said Howard Silverblatt, senior index analyst at Standard & Poor's. "We've seen broad gains, not for the entire world, but it's going to be a very decent quarter."
Usually, the last few weeks of a quarter are the domain of companies warning investors that, due to anything from higher materials costs to fewer customers, profits aren't going to be as high as Wall Street analysts had forecast.
Certainly, a few companies have said that over the past month, most notably technology firms Research In Motion Ltd. and Adobe Systems Inc., as well as cruise ship operator Carnival Corp., which was particularly vulnerable to higher fuel prices in the quarter.
Yet other companies with similar vulnerabilities have issued positive outlooks. National Semiconductor Inc., Qualcomm Inc. and Palm Inc. proved that profits in the tech sector still have room to surprise Wall Street.
Retailers, coming off a warmer than expected winter, are also issuing more positive forecasts. Dick's, Barnes & Noble Inc., Best Buy Co., Rite Aid Corp., and the Sports Authority Inc. all came out with the "upside surprise" investors like to see.
"You certainly have to give some of the credit to that nice, warm January, but there's more to it than that," said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco. "People sort of discounted earnings in the first quarter because we thought the economy was slowing down, and it turns out the economy is still going strong."
Even the large-cap Dow Jones industrials, which are more sensitive to larger economic trends, are modestly bullish. DuPont gave analysts a better-than-expected outlook, while forecasts from fellow Dow industrial United Technologies Corp. was on par with Wall Street's predictions.
Other major companies with generally in-line outlooks include FedEx Corp., which can also be sensitive to fuel prices, software maker Oracle Corp., consumer products maker Procter & Gamble Co. and food producers Del Monte Foods Co. and General Mills Inc.
Despite the big names issuing positive guidance, the ratio of negative-to-positive outlooks remains at 2.3 to 1, according to Thomson Financial. That's still slightly worse than the average 2.2 to 1 ratio seen in most quarters. However, Thomson analysts said the ratio stood at 2.5 to 1 back in early February -- for it to have moved lower required more positive surprises over the last month.
Yet Silverblatt is forecasting first-quarter earnings to rise 11.3 percent overall. Already, the quarter's results have been led by a strong performance at Wall Street firms, particularly Goldman Sachs Group Inc.'s record profits and revenues.
However, Silverblatt warned that the rest of the financial sector, particularly insurers still reeling from hurricane-related claims, would drag that sector lower.
Likewise, high energy costs will continue to plague the materials sector.
"It takes a while for those oil prices to work their way through materials, and you'll start to see some of that now from our fourth-quarter record highs in oil," Silverblatt said.
For most other stocks, however, the first quarter is shaping up to be a pleasant surprise. It's the second quarter that could prompt some concern, as Silverblatt believes earnings could finally break that 16-quarter double-digit growth streak.
"The cost of oil will likely still be pretty high, consumer spending is slowing down, and it'll be tax time," Silverblatt said.
Koesterich agreed, noting that the Federal Reserve's rate hikes have already driven up credit card and mortgage rates, and that credit card minimum payments will soon double. Combined with the possibility of $3-per-gallon gasoline for a second straight summer, future earnings -- especially for companies dependent on consumer spending -- will have a hard time achieving strong growth.
"The consumer is losing the ability to defend his lifestyle, and that means eventually he'll have to cut back on spending," Koesterich said. "Whether this will really come to a head in 2006 or 2007 is up in the air, but it's coming."