Trader Talk

Goldman Earnings: Strengths and Weaknesses


European stocks are up as Greece successfully floated short-term debt (13 week bills at a rate of 3.65 percent, more than twice the 1.67 percent they floated for the same maturity back in January) and German investor confidence was better than expected.

Elsewhere, earnings season is in full swing:

1) Goldman Sachs reported blowout earnings of $5.59 (Street consensus $4.01), revenues of $12.78 billion vs. consensus of 11.0 billion. Like the other investment banks, trading was strong (fixed income, currency and commodity trading up 86 percent, equity trading also strong), investment banking was weak.

A difficult but improving macroeconomic environment was noted in the conference call.

2) United Health kicked off earnings season for HMOs, well above expectations. They significantly boosted 2010 guidance to $3.15-$3.35 (prior guidance of $2.90-$3.10), and also slightly boosted revenue estimates to $92 billion from $90 billion. The medical loss ratio of 81.3 percent is 110 basis points below the same period last year.

As suspected, pricing is improving, costs are moderating, reserves are in good shape.

3) Delta kicked off airline reporting season with a loss of $0.23 per share, in line with consensus. Management guided operating margin to 8 to 10 percent for the second quarter; this is very fluid because it is not clear what the impact from the volcano will be.

PRASM increased 8%, driven by a 5% improvement in yield and a 2 point improvement in load factor

4) IBM reported earnings of $1.97, four cents ahead of expectations, revenues up 5 percent and a bit above expectations as well.

The good news: gains in software (up 5 percent) and hardware (up 2 percent), suggest business is slowly improving.

The bad news: service signings (a leading metric) was down 7 percent

Still, management increased guidance for the full year slightly, to $11.20. plus, from $11.00.

Trading down 2 percent pre-open; IBM has sold off rather aggressively on its earnings news in the last two quarters

5) Johnson & Johnson is up fractionally after its Q1 earnings topped estimates $1.29 (vs. $1.27 consensus). Sales rose in-line with forecasts, but the gains were primarily due to currency exchange rates (which made up 2/3 of the 14 percent gain in international sales). More troublesome were sales in the U.S. (down 5 percent) as well as sales of prescription drugs (down 2.5 percent)

Guidance for the full-year was lowered slightly due to the impact of the strengthening dollar. The health care company now sees earnings of $4.80-$4.90 (vs. $4.90 consensus).

6) Just like J&J, Coca-Cola saw most of its 5 percent gain in sales due to currency impact.

The stock is falling 2 percent despite topping Q1 earnings expectations ($0.80 vs. $0.75 consensus). The problem: sales were weaker than the Street hoped as North American volumes fell 2 percent. Weakness in its domestic market offset stronger volumes overseas (up 5 percent).

7) Illinois Tool Works Q1 earnings easily surpassed expectations ($0.63 vs. $0.57 consensus) on soaring margins and improving sales of its industrial products (fasteners, polymers, fluids, etc.). Organic sales rose 7 percent in North America and 8 percent overseas. Margins also soared from the prior year.

The manufacturer raises full-year guidance on the heels of its Q1 performance as well as a strong outlook for the current quarter. Q2 earnings are seen between $0.74 and $0.86 (vs. $0.69 consensus) with sales growing 15 percent-19 percent (vs. expectations of 13 percent growth).

More strength in the industrial industry. Eaton is up 4 percent after the manufacturer topped estimates on a strong 10 percent rise in sales.

Its outlook for the current quarter is bullish too, as earnings are seen between $1.05 and $1.15 (vs. $0.95 consensus). Its likely strong first half also enables the firm to raise its full-year guidance to $4.15-$4.45 (vs. $.4.04 consensus). Chief Executive Alexander Cutler notes “the strongest growth in Asia and Brazil, while many U.S. markets are starting to accelerate and Europe is recovering more modestly” this year.

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