Cautious view on analysts' expectations on corporate earnings (page 1 of 3)

US Equities

• Recommendations update

As earnings period continues this week, we would like to reiterate our general cautious view on analysts' expectations on corporate earnings. Believing they may be too optimistic for the coming quarter. Based on a study by CSFB, analysts have lowered their earnings growth rate forecasts for the S&P 500 for the first quarter to -3.4% q-o-q and to 9.8% y-o-y. However, the growth rates for the second quarter are at 11.7% q-o-q, and 8.9% y-o-y. Hence, these estimates could be optimistic given the weak US economy. Therefore, we could see further earnings warnings this reporting season. Based on earnings growth rates estimates, and market capitalization, CSFB expects that profit warnings issued by companies in Materials, and Consumer Discretionary sectors would have the highest impact on the S&P 500 estimated growth rate for the second quarter, while profit warnings in Financials sector would have the lowest impact.

Among our recommendations, Countrywide Financial Corp. (CFC, $59.67, CSFB: Not rated) will report its first quarter earnings on April 29th. Consensus expects $2.081 EPS, representing a 57%-increased y-o-y. We would not be surprised if the company attains this record EPS due to the current mortgage industry. With the current low mortgage rate, mortgage originations are high. Last week, Citigroup Inc. (C, $38.26, CSFB: Outperform), and JP Morgan Chase & Co. (JPM, $26.50, CSFB: Outperform) announced profit growth in part due to high mortgage volume. Besides CFC's strong business, we still believe the company offers an attractive way to diversify a portfolio due to its negative correlation with the S&P 500, based on a two-year analysis. Therefore, we reiterate our Buy rating on Countrywide Financial.

Investors in the oil sector have highlighted the 24th of April in their agenda, as they will be watching closely the OPEC decision on a change in production quotas. In fact the market has already started to price in a reduction OPEC output, as crude oil prices rise. The West Texas Intermediate rose to USD 30.57 per barrel last Thursday, driving our recommended oil and oil service stocks Exxon Mobil (XOM, CSFB: Neutral), Schlumberger Ltd. (SLB, CSFB: Neutral) and Noble Corp. (NE, CSFB: Neutral) higher.

We expect the oil market to remain volatile, but in our view the supply-demand situation could be more favourable for our oil stocks than the market currently anticipates. After the recent oil worker strikes in Venezuela, the country has still not reached its normal production levels. With a daily output of 2.25 million barrels in March it is still 20% below its quota of 2.8 million barrels a day.

We see the crude oil prices fluctuating between USD 28-32 in the near term, based on the assumption that the oil market should remain tight. This environment should be favourable for our recommended oil and oil service stocks, which we believe should see some strength over the next couple of weeks.

The three companies are also due to report their quarter earnings during this week. Schlumberger is expected to report an EPS of USD 0.24 on the 22nd, Exxon Mobil forecast is for an EPS of USD 0.70 on the 23rd, and for Noble Corp we are looking for an EPS of USD 0.31 on the 23rd of April.

We have added Qualcomm Inc. (QCOM, CSFB: Neutral) to our US Buy List, after the company's shares declined due to weak numbers reported by a competitor making radio frequency chips for mobile phones. Qualcomm however has reaffirmed its earnings guidance for its first quarter and also for the current quarter.