- Insurance
2009 Earnings Projections
by
Charles Rotblut
Profit forecasts for 2009 continue to be cut in large numbers. For every positive revision , there have been 6 cuts. The ratio is roughly the same whether the sample group is the S&P 500 or the larger Zacks Rank universe, which contains about 4400 stocks.
There is also quite a bit of difference in what analysts are forecasting. Last night, I calculated projected earnings growth for the S&P 500 based on the lowest, consensus and highest estimates. Here are the results based on a bottom-up calculation. Lowest estimate: $71.60 (-5.8%) Consensus estimate: $91.14 (+9.5%) Highest estimate: $111.14 (+20.7%) The bottom-up estimate is calculated by using the individual earnings estimates for each company and then applying an index-weight to it. The lowest estimate uses the lowest profit forecast for each company. The highest estimate uses the highest forecast for each company. It is possible that some of the highest forecasts are close to 90 days old, meaning that analysts have yet to adjust them for the credit crunch. The top-down forecasts, which are consensus estimates made for the S&P 500 as a whole, show a tighter range. Lowest estimate: $75.20 (+1.6%) Consensus estimate: $93.73 (+6.9%) Highest estimate: $108.00 (+7.5%) As I have said previously, these profit forecasts need to be taken with grain of salt. Brokerage analysts are doing their best to make educated guesses, but the assumptions used in their models could end up being very wrong. It’s not the analysts’ fault, but rather just current reality. Credit Markets The credit freeze is continuing to show signs of thawing, a positive. The 3-month London-Interbank Offered Rate (aka “LIBOR”) is down to 2.29% as of Friday morning. At the height of the credit crunch, the rate had reached 4.82%. This rate is used as the basis for many loan terms, including the interest rate on your and my credit cards. The TED Spread, which is the difference between the LIBOR rate and 3-month treasury bill rates, has also narrowed. Friday’s spread of 2% is well below the recent peak of 3.66%. Higher TED spreads imply greater credit risk. Prior to the current credit crunch, the TED spread was 0.11%. The Election and the Our Portfolios During the campaign, President-Elect Obama said that healthcare will be one his top priorities. Since the Focus List presently has a heavy weighting towards the medical sector, I want to address why I’m not concerned. Healthcare will be a major battle. There are too many players with high-powered lobbyists to allow true change to occur without a fight. Furthermore, even if the U.S. moves towards national health care, much of the existing system could be kept in place. Switzerland has universal coverage AND powerful insurance and pharmaceutical companies. In other words, I expect most companies within the medical sector to remain profitable long after President-Elect Obama leaves the White House. This said, we will monitor progress and make changes to the portfolio if legislation dictates it. The Markets Despite all of the volatility, we are still in one big trading range. The post-election pullback occured as the Dow was just above resistance and overbought on a short-term basis. There was a big rally headed into the election, so a sell on the news reaction was not surprising. In a monthly column that I write for SFO Magazine’s web site, I described the Dow’s range as between 8200-9450. We might see some intraday swings slightly outside these numbers, but I think it’s a close approximation. Though this is a big range, if the Dow can start to see more days with double-digit moves, as opposed to triple-digit moves, then investor confidence would be more fully restored. The Focus List We did not make any changes this week, but there are a few companies we are looking at closely. Our target is adding 2-3 companies per week. Perrigo’s (PRGO) earnings were a penny below expectations, but guidance seemed to be okay. We’re looking at the estimate revisions as they come out. McDonald’s (MCD) said the stronger dollar could hurt fourth-quarter earnings. I do think the company will benefit from more frugal consumers in the U.S., however. We’re going to monitor the estimates revisions.
Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com.
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2009 Earnings Projections