Q4 Earnings: How Will Sectors Stack Up?

S&P's chief investment strategist offers a preview of how key groups will fare as earnings season gets under way

By Sam Stovall From Standard & Poor's Equity Research

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Alcoa's (AA) fourth-quarter results, released after the close of trading on Monday, Jan. 12, set a somber tone for the upcoming fourth-quarter 2008 reporting cycle. The metals giant posted a loss of 26¢ per share, vs. positive earnings per share of 37¢ one year earlier, before special items in both periods, on a 19% sales decline. The loss was wider than S&P's estimate of an 8¢ loss. Based on a less optimistic view for Alcoa's end markets, S&P analyst Leo Larkin cut his 2009 EPS forecast for Alcoa to 17¢ from 44¢ and lowered his 12-month target price to $9 from $10. Larkin thinks the shares are vulnerable, given S&P's view that Alcoa will not be able to maintain its dividend at the current rate.

Other earnings reports of merit this week include Genentech (DNA), ranked 4 STARS (buy), on Thursday, and three semiconductor stocks: Linear Technology (LLTC) on Tuesday, Jan. 13; Xilinx (XLNX) on Wednesday, Jan. 14; and Intel (INTC) on Thursday, Jan. 15. (Intel is ranked 4 STARS, while both Linear and Xilinx are ranked 3 STARS, hold.)

Go-Go at Genentech

Steven Silver covers Genentech for S&P and forecasts 2008 and 2009 revenues of $13.1 billion and $14.6 billion, representing 11% and 12% growth, respectively. He sees growth slowing because of a maturing product roster, no new drugs entering the market in 2009, and intense competition. He forecasts fourth-quarter 2008 EPS to rise 41%, to 83¢, from 2008's 59¢. On Jan. 9, the Financial Times stated in an unconfirmed report that Roche is preparing a revised bid to acquire the company, which will be delivered in early February. Silver does not expect Genentech to address this speculation during the company's Jan. 15 conference call.

Silver has a positive fundamental outlook on the biotechnology subindustry, reflecting his expectation of solid sales and earnings over the next 12 months, despite global economic challenges. In recent periods, most leading firms have reported robust drug demand, while practicing fiscal responsibility. Although he expects pressure for a regulatory pathway for biogeneric drugs and increasing scrutiny of drug prices during the Obama Presidency, he expects greater Food & Drug Administration funding in the Obama Administration helping to alleviate capacity constraints, which S&P believes have slowed drug approvals.

Clyde Montevirgen covers Intel for S&P. He thinks company sales will fall at least 10% in 2009, following projected flat sales for 2008, reflecting an anticipated slowdown in PC sales. He sees macroeconomic pressure will likely lead to slower orders as the supply chain tightens inventory. However, he believes that Intel's new and soon to be released microprocessors will outperform competitors' offerings, which should lead to market share gains and increasing sales to higher-end segments, supporting longer-term growth.

He forecasts gross margins narrowing to around the 54% area for 2009, versus an anticipated 56% in 2008. He estimates EPS under generally accepted accounting principles (GAAP) of $1.00 for 2009, compared with a projected $1.15 for 2008, and projects December quarter results to come in at 21¢, vs. 38¢ in 2007.

Clyde also has a negative fundamental outlook on the semiconductor group, and sees industry revenues falling about 12% for 2009 from an estimated advance of around 2% for 2008. Considering recent notes from S&P Economics and market and industry researchers, and chipmaker's earnings reports, he projects falling unit shipments for key end-markets, such as computers, cell phones, and other consumer electronics, which make up a large percentage of the semiconductor industry's demand. Clyde thinks that the challenging macroeconomic environment will lead to order reductions, push-outs, or cancellations until demand visibility improves.