Energy And Finance Ends Of The Spectrum

With the second quarter coming to an end in another week, we thought we’d get a jump on what trends might be anticipated going forward into the second half of the year. Helping us sort things out among different industries of strength and weakness is Dirk van Dijk, CFA, the Director of Zacks Equity Research.

Where do you see strength heading into June quarter earnings season in a few weeks?

Energy is currently expected to win the growth derby, which is not exactly a shocking idea with oil trading as high as it has been. Perhaps the bigger question is: Why isn’t the expected growth rate much higher than it is? After all, the price of crude has just about doubled since this time last year. Since it cost them something to get the oil out of the ground last year one would expect that gross profits would more than double as a result. The 19.7% year-over-year growth in EPS for the sector looks very conservative to me.

From which industries should investors steer clear in the near term?

Once again, the biggest expected loser in the quarter is expected to be the Financials, with half the firms seeing a drop in their EPS of over 11.1%. Consumer Durables follows closely behind with an expected drop of 7.3%.

The revisions picture for the Financial sector is even worse for 2009 than it is for 2008, coming in at 0.20, or five cuts for every increase. Revisions like these will eat away at the robust earnings rebound seen for 2009 (unless 2008 gets cut faster). We do not seem to be getting out of the woods on the Financial sector front. While there is weakness throughout the sector, one of the worst areas seems to be Banks with big exposure to Ohio, such as KeyCorp (KEY), Fifth Third (FITB), National City (NCC) and U.S. Bank (USB).

Given that the bulk of the stimulus checks are being mailed out before the June quarter ends, it would not surprise me if the retailers do a little bit better than expected for the quarter. However, even if that is the case, the effect would be short lived. The expected rebound to 4.3% growth in the third quarter seems to reflect slower assumptions about the pace of stimulus check disbursements than has actually happened.

Do you see a silver lining anywhere here?

The blame for expected net income decline will once again go to the Financials, but so will the credit for a less severe decline than last quarter. Overall, total net income for the S&P 500 is expected to be 11.0% below the second quarter of 2007. In the Financial sector, total net income is expected to be 46.8% lower. In both cases, this marks a significant improvement over the first quarter when the overall S&P 500 was down by 16.7% and the Financials were down 81.1%.

How about any caveats going forward?

Energy is expected to be the only sector to post a double digit gain in total net income for the quarter, with a rise of 13.6%, but even there, that is significantly slower growth than the 25.8% posted in the first quarter. Consumer Staples and Tech are the only other two sectors expected to even surpass the 5.0% growth mark.

Overall it is a picture of widespread earnings weakness for the quarter. The biggest question is the extent to which the Financials have already come out with all their dirty laundry over the last two quarters.

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