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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Earnings Season: 5 Things to Watch

Wall Street earnings forecasts aren't too optimistic.
By BRIAN SOZZI Apr 01, 2015 | 08:00 AM EDT
Stocks quotes in this article: GIS, K, CHD, KMB, CLX, DPZ, WMT

Investors are starting to freak out about the looming earnings season, with good reason.

S&P 500 companies have watched their earnings-per-share estimates being taken down by spreadsheet-loving stock analysts by a whopping 8.2% since January. Blame the dollar, gripe about limited pricing power in corporate America and, of course, blame the influence of weak oil prices. Wall Street expects a decrease in earnings per share year over year in the first quarter of 4.2%.

If earnings do decline as my geeked-out peers expect, it would represent the first year-over-year fall since the third quarter of 2012. That is no joke considering corporate bottom lines continue to be propped up by share repurchases, clever accounting by CFOs and exposure to lower tax jurisdictions for businesses based abroad.

What this essentially means: Brace for one abnormally volatile earnings season where down is up and up is down. It has been some time since investors have had to deal with such a series of oddities like a strong dollar, low oil prices, a strengthening labor market and a Fed that is preparing for gradual rate increases into 2016.

Here are five things I am watching right off the bat when earnings season kicks off in mid-April.

1. Who is passing along higher prices? Price gains at packaged-goods giants General Mills (GIS), Kellogg's (K), Kimberly Clark (KMB), Clorox (CLX) and Church & Dwight (CHD) are indeed on my list. The market seems hell-bent on believing consumers are not out there spending given the 5.8% savings rate in the country. Yet, I have been pleasantly surprised by some of these packaged-goods guys being able to pull back on trade promotions and sell items closer to full price. They have to: Tons of money are being poured into R&D to reformulate products or introduce new stuff that meets an unforeseen need inside of households.

2. Sales growth rates in emerging markets: I recently came across a report that retail sales in Hong Kong fell 2% this month. We are also seeing sales slowdowns in many emerging markets due to currency volatility. The market, in my view, is not prepared for a deep emerging-markets slowdown that in large part is caused by global central bank policies. The iShares Emerging Markets Index has risen about 2% year to date, outperforming the Dow Jones Industrial Average and S&P 500.

3. What huge companies are stripping themselves down further? I want to bet on these companies who have execs willing to hatchet off lagging businesses with limited future prospects. Although the moves will bring charges to earnings in the near term, exiting weak businesses is best for the long-term health of the company. As I said recently, I believe packaged-food giant General Mills is prepared to exit some businesses -- for example, Green Giant.

4. What are the top-line growth rates looking like at best-in-breed companies? The inclement weather hurt many companies in the first quarter. So did three more months of tepid wage growth. But those companies with true fundamental strength should be able to maintain their recent sales growth rates, or visibly outperform rivals who have gotten weaker compared to the fourth quarter. I think Domino's Pizza (DPZ) is having another strong quarter, helped by mobile order advancements and strong interest in sporting events.  Not too keen on Yum Brands (YUM) here, concerned with the ongoing struggles of Pizza Hut.

5. Dollar impact: It almost goes without saying, but the cumulative impact of the stronger dollar is important to watch. Wal-Mart's (WMT) top line has likely been slaughtered as a result. However, if the dollar crushed a company's performance, and the stock advances on earnings day, it could be a nice tell that the market has gotten over its dollar worries. Instead it's looking six to 12 months down the line, when the company will cycle theoretically easier comparisons -- and post stronger sales and profit growth in turn.

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At the time of publication, Sozzi had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

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