Mixed expectations in the US for the earnings season ahead (page 1 of 3)

US Stocks

The stock price of IBM (IBM $97.25) is approaching its September-11 low of $93.00 as the market braces itself for the upcoming 1Q-result announcements. The following developments certainly played a part in the stock's current negative performance: Lower pension income, declining share buyback, higher tax rate, higher provision for bad debt.

All the above will affect earnings in the short term. But at $97, the price has reflected a low single digit growth for the next 5-yr with a discount rate of 8.50% (based on a DCF calculation). Despite recent downgrade in earnings, the consensus is still looking for 7% growth for this year. We would definitely recommend our client to accumulate the stock at current levels.

Microsoft (MSFT $55.87) is also heading south as software sector weakens due to weak earnings outlook. Latest survey showed MSFT is gaining market share from Linux in the web server market. MSFT racked up a market share of 34%, while Linux lost 5% to 53%, and SUN Microsystems dropped to 2.33%. It also announced that it would restructure its business units. The new structure will give the core leaders of the different units a deeper control and accountability in the way they run their businesses. The President and COO of the company, Rick Belluzzo will leave the company by September, as in the new structure the heads of the business units will have to report to CEO Steve Ballmer, who likes to exercise more direct control. We still like the stock for the long term and would accumulate at current levels.

The recent rally in the oil price took an abrupt end when OPEC makes it clear that its members will not cut production as a countermeasure for the pro Israeli stance the US has in the current conflict in Israel. Oil-service companies have a strong correlation to the oil price, as they can expect higher capital spending by the integrated oil companies, which see a better return on their investment, while the oil price is high. So it is not surprising, when Schlumberger Ltd. (SLB US: $54.39) saw some weakness in its share price. We expect this weakness to continue, as the strong oil price was more sentiment driven, than demand driven. We have indeed not seen signs of significant output cuts. Recently we have advised investors to reduce their positions in Schlumberger and would like to reiterate this advice.

US Technology

Over the week, a string of negative company pre-announcements hit share prices and have further dampened sentiment on technology issues listed on NASDAQ. The software sector was especially affected, as several companies within the segment warned of weaker earnings that would fall short of the analyst's estimates. The result was a series of earnings revisions and downgrades by analysts. We did not expect the quarter to be that bad. We were indeed hoping for some indications of a recovery but the recent warnings have curbed our optimism on software companies.

Business software makers continue to experience a hard quarter in achieving their numbers as customers are still delaying investments in large IT projects. Peoplesoft Inc. (PSFT US: $25.17; CSFB rating: Hold) fell more than 30% as the company announced it would miss its forecast due to the negotiations of some bigger discounts by the clients. Those price cuts indicate the shape of corporate IT spending environment which continues to be disappointingly tight. On the Peolpesoft announcement share prices of Oracle Corp (ORCL US: $12.13; CSFB rating: Buy) and Siebel Systems Inc.