Earnings Central: It's All About The Outlook

It’s all about earnings next week. Well, sort of.

With recession fears becoming more entrenched, and not much in the way of major economic data next week, investors will be scanning earnings releases to take the temperature of Corporate America. What is important is the outlook.

This week’s selloff of U.S. stocks - to some extent - reflects a belief by investors that earnings forecasts will be coming down for the fourth quarter, and perhaps longer.

This is proved out by the fact that while the perception of earnings is dismal, the reports have actually been a bit better than expected. So far, of the 131 companies in the Standard & Poor’s 500 Index that have reported earnings for the third quarter 66.4% have beaten estimates, 8.40% were in-line, and 25.9% have fallen short of analyst forecasts, according to Reuters Estimates.

What’s spooked investors has not been the earnings themselves, but what the companies are saying about the climate they are facing.

This was most clearly illustrated by Caterpillar. The world’s top maker of earth-moving equipment, said several key industries it serves, including trucking and nonmetal mining, are “in recession.” It continued by saying the residential building industry is in “severe recession” and noted its nonresidential construction industry is declining as fast.

Next week’s reports should offer plenty more clues about the economy. It actually is the busiest week of the third-quarter earnings season, with 163 companies in the Standard & Poor’s 500 Index expected to report. Of those, six are components of the Dow Jones industrial average.

Monday:

On Monday, investors will hear from companies including Dow components Merck and American Express.

Merck has been having a good year. The pharmaceutical company has increased its earnings forecast three times this year, and is expected to see its latest earnings rebound from last year’s third quarter, when it felt the blows of lost patent protection for its popular cholesterol drug Zocor and the effects of the withdrawal of pain drug Vioxx.

Merck’s third-quarter earnings are expected to rise to 69 cents a share on revenue of $6.06 billion, according to Thomson Financial.

Meanwhile, rival Schering-Plough, which also reports before the market opens on Monday, is expected to earn 30 cents a share, on revenue of $2.87 billion, according to Thomson. Although earnings are expected to fall, revenue will be higher than a year ago.

Investors also will gain a glimpse of how toymaker Hasbro is faring as news of toy recalls dominated the headlines in the third quarter. Hasbro is expected to earn 78 cents a share on revenue of $1.18 billion, Thomson said.

Reporting Monday

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Kimberly-Clark, the maker of Huggies diapers and Kleenex tissue, is expected to see its earnings rise to $1.06 a share on revenue of $4.52 billion.

Investors also will gain another glimpse of how the major oilfield service companies are doing. On Friday, Schlumberger, the leader of the sector, outpaced analyst expectations. Then, on Sunday, Halliburton also outpaced estimates, which called for earnings 64 cents a share on revenue of $3.87 billion. Next up is Weatherford, which is is expected to earn 84 cents a share on revenue of $1.99 billion, according to Thomson.

After the market’s close, investors will hear from American Express. The company is expected to earn 85 cents a share on revenue of $7.29 billion, Thomson said.

Earnings also are expected from Apple and Texas Instruments after the bell. These reports will give investors another read on the health of the tech sector.

Apple earnings are expected to rise sharply to 86 cents a share on revenue of $6.07 billion. A year ago, the company earned 62 cents a share on revenue of $4.84 billion. Investors are likely to focus on the pace of iPhone sales.

Texas Instruments, one of the top chip makers, is expected to report lower revenue, but higher earnings when it reports on Monday. On average, analysts surveyed by Thomson Financial expect TI to report earnings of 50 cents a share on revenue of $3.66 billion.

Expectations for the Dallas company may be running high in the wake of strong earnings from Nokia, one of the world’s top cellphone vendors and TI’s biggest customer. Nokia reported an 85 percent jump in profit on Thursday, fueled by market share gains.