Earnings Season Begins in Earnest

Tuesdays-Thursdays the next few weeks will be the heart of earnings season - we began today. Thus far I cannot make heads or tails of the action. Remember, our thesis we've been promoting all year - 2nd half 2008 estimates are far too high, especially fourth quarter hence guidance is going to have to be cut across many names; analysts are simply behind the ball. Since the dollar has rallied, what used to be safe haven (multinationals) who have been benefiting from a weak dollar, which is hiding pathetic organic growth, are going to see that benefit begin to erase. While CNBC cheered the multinational growth 1-3 quarters ago we were pointing out how much of it had nothing to do with "growth" and everything to do with a weakening US dollar. Now that will reverse. And now with the damage the credit contraction has done to the system we are adding another layer of bad onto what was already going to be poor. The question is how much of this is priced in, and how do the stocks react? While everyone has been focused on the credit situation I continue to believe the market is underestimating the coming earnings plunge due to the real economy.

Here are some results so far today and in the near term

Johnson & Johnson (JNJ) - steady Eddie

• Health care giant Johnson & Johnson on Tuesday reported a 30 percent jump in third-quarter profit, beating Wall Street expectations, due to the absence of a $745 million restructuring charge a year ago, as well as higher sales of consumer products and medical devices. The New Brunswick, N.J.-based maker of contraceptives, baby care items, medical devices and prescription drugs reported net income of $3.31 billion, or $1.17 per share, up from $2.55 billion, or 88 cents per share, in the year-ago period.
• Revenue climbed 6.3 percent, to $15.9 billion from $14.97 billion, but was boosted 3.1 percent by favorable currency exchange rates because of the weak dollar.

PepsiCo (PEP) - which is supposed to be another safe haven is down 9%. Further they are cutting 3300 jobs. You know it is bad when Americans are not only cutting back on $4 lattes (Starbucks) but $1.25 2 liters.

• PepsiCo announced plans on Tuesday to cut 3,300 jobs and close six plants as it deals with lagging U.S. drinks sales and a surging dollar, which will hurt profits from its rapidly growing international business. The announcement came as the global snacks and drinks maker reported a 9.5 percent drop in third-quarter profit that missed Wall Street expectations. It also offered a downbeat profit outlook.
• The (job) cuts will affect managerial and factory jobs both in and outside the U.S. The nation's second-largest drink maker -- which also owns the Frito-Lay, Tropicana and Quaker brands -- said the cuts would generate pretax savings of more than $1.2 billion over the next three years. It plans to save $350 million to $400 million in 2009.
• PepsiCo Inc. also noted that the recent surge in the U.S. dollar will hurt fourth-quarter profit. At current rates, the incremental impact would be about 4 cents to 5 cents per share.
• "Pepsi missed consensus operating earnings, lowered full year guidance and didn't provide an '09 outlook at this point," Morgan Stanley analyst Bill Pecoriello said in a note to investors.

In steel, we have comments from Korean steel maker Posco (PKX) - with auto sales falling off a cliff, this will impact steel worldwide.

• Despite a 40% leap in its third-quarter net profit, South Korean steel maker Pohang Iron & Steel Co., better known as Posco, admitted that business conditions would grow more difficult in the fourth quarter as a result of higher raw material costs, adverse currency effects and weaker worldwide prices for steel.
• The steel maker cautioned that the peak of the industry's cycle is now past. "The fourth-quarter business outlook is seen tougher as the global financial crisis will slow steel demand growth from the auto and construction sectors, while higher input costs and a tumbling won currency will add further pressure," Posco stated in a company release.
• Spot steel prices have fallen more than 20% from this year's record highs in June and July, prompting rivals in China, Russia and Europe to cut output to bolster prices.

You know times are bad when pizza sales begin to falter - Domino's Pizza (DPZ) is down just about 30% today - remember, last fall we said this cycle would be destructive to restaurants as both input costs rise and the US consumer retrenches big time. [Sept 19 2007 - Tough Times Ahead for Restaurants?]

• Domino's Pizza Inc (DPZ) posted a weaker-than-expected quarterly profit due to a sharp drop in U.S. sales, the biggest independent U.S. pizza chain said on Tuesday. The company's chief executive warned that improving its fortunes in a sputtering U.S. economy would be "very tough."
• "Our operators face the powerful forces of high commodity prices, consumers who are reluctant to spend, and a credit crunch that has slowed domestic new store growth, reinvestment in stores and our ability to expedite the turnover of poor-performing franchisees," CEO David Brandon said in a statement.
• Sales at U.S. restaurants open at least one year fell 6.1 percent in the quarter. International same-store sales rose 5.4 percent.
• Domino's also said its ability to draw upon its variable funding notes has been reduced after Lehman Brothers, the primary provider of those funding notes, declared bankruptcy. Domino's said it is looking for alternate sources of funding.

Another familiar name/sector to blog readers - Las Vegas casinos; Wynn Resorts (WYNN) warned of bad results last night. Again, these are all dominoes in our "Pooring of America" scenario where Americans will be forced into savings, and cut back discretionary spending sharply. Wynn is the best of the best but even it is not immune to the macroeconomic situation; the results of a typhoon of issues are now starting to show in the companies results.

• Some analysts lowered price targets on Wynn Resorts Ltd. Tuesday after the casino operator preannounced weaker-than-expected third-quarter results for its Macau properties.
• Wynn Resorts also said it expects its Las Vegas unit to report results ranging from a loss of $2 million to profit of $2 million for the quarter. The division reported a profit of $35.8 million in the prior-year period.
• "The core of the third-quarter shortfall is the result of lower slot volume and table hold in Las Vegas, as well as an increased bad debt reserve for both Las Vegas and Macau owing to global economic uncertainty," Jeffrey Logsdon of BMO Capital Markets wrote in a note to clients.
• The company did not offer a revenue estimate. But it said at Wynn Las Vegas, revenue per available room, or revpar, was expected to be down 4 percent to $261 during the period as occupancy slipped. Revpar is considered a key gauge of a hospitality company's performance.

Bellweathers Intel (INTC) and railroad CSX (CSX) report after the bell. CSX is more interesting to me since it's blossomed as a proxy for global trade, but the market will probably react more to Intel. Again, it will be a tough earnings season to hold stocks - but many stocks have been obliterated to the point that anything short of bankruptcy might send the stocks up - the question is which stocks are those, and which - like say PepsiCo - are there too many oblivious bulls hanging out in.

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