Trader Talk

Earnings early returns give reason for cheer

Pisani's market open: Earnings so far
Pisani's market open: Earnings so far

This week, a mother lode of second quarter earnings are due. Early results are giving Wall Street reasons to be encouraged.

Thus far, 89 companies have reported for the quarter, according to S&P Capital IQ. Earnings growth stands at 6.9 percent, an increase since the beginning of the season. Revenues have come down one-tenth of a percent since last week, now at 3.8 percent for the quarter.


Traders work on the floor of the New York Stock Exchange.
Getty Images

1 )Bank results can be characterized by two issues: modest loan growth and low interest rates. Both are a problem for share prices.

Regional banks are continuing to report earnings, and the story is largely the same: loan growth is sluggish (4 to 7 percent year-over-year gains are typical), although net interest margin (the spread between what banks charge for loans versus what they pay for deposits) is dropping.

Atlanta, Georgia-based Suntrust Banks reported core earnings per share (EPS) above expectations (part of due to more more loan reserve releases), with revenues about in-line with expectations. They derive about two-thirds of revenue from consumer and mortgage banking, though it also has a commercial business that is about one-third of its earnings.

Average loan growth was up 7 percent year-over-year (1.8 percent quarter-over-quarter), but net interest margin dropped 8 basis points to 3.11 percent.

A similar story played out for North Carolina-based BB&T, which gets roughly two-thirds of its revenue from a combination of community banking, residential mortgages, auto loans, and property, casualty and health insurance. BB&T missed earnings estimates, partly due to an increase in mortgage and tax-related reserves. Net interest margin also declined 8 basis points, to 3.43 percent.

Bottom line: we need better loan growth (closer to 10 percent year over year rather than 4 to 7 percent) and higher interest rates to make loans a more profitable business. Still, there's an even bigger problem, which I outlined last week: banks overall are expensive. SunTrust trades at 13 times forward earnings; BB&T at 13.1 times forward earnings. This is roughly what many were trading at prior to the 2008 crisis, yet the money being earned is not back to those levels.

2) Halliburton reported earnings in-line with expectations, but authorized an addition $4.8 billion stock repurchase. Though Halliburton is thought of as international oil service company, they get half their revenue in the United States. With hydraulic fracturing (fracking) activity in the U.S. robust, the company accelerated its fracking fleets—keeping the focus on U.S. activity.

3) AK Steel and Steel Dynamics have bought the U.S. assets of Russia's Severstal for a total of $2.3 billion. AK Steel is buying Severstal Dearborn while Steel Dynamics is buying Severstal Columbus. This seems like a good deal all around.

Severstal's Dearborn steel plant is located in close proximity to many of AK Steel's customers and would help consolidate Detroits's auto steel supply chain. Steel Dynamics would reportedly get the lowest-cost sheet mills in the U.S, more than doubling the company's capacity.

--By CNBC's Bob Pisani