GM to Apple Ride Consumer Confidence to Higher Profits

Profit growth for U.S. companies probably accelerated for a third straight quarter as strengthening consumer demand drove sales for General Motors Co. to Apple (AAPL) Inc. and underpinned a manufacturing recovery.

Fourth-quarter earnings per share for companies in the Standard & Poor’s 500 Index rose 4.9 percent from a year earlier, according to analysts’ estimates compiled by Bloomberg, outpacing gains of 4.8 percent in the third quarter and 3.8 percent in the second. Estimates have trailed actual growth by at least 1.8 percentage points in the past three quarters.

The profit growth was aided by a jump in consumer confidence to the highest year-end reading in six years and by industrial production that surpassed its 2007 peak for the first time in November. While results are still uneven, with online retailers such as Amazon.com Inc. (AMZN) outperforming brick-and-mortar chains including Pier 1 Imports (PIR) Inc., consumers are being bolstered by a five-year low in the unemployment rate and last year’s 30 percent surge in the S&P 500.

“The consumer is actually starting to step up,” said Mitchell Stapley, chief investment officer for Cincinnati-based ClearArc Capital, which oversees about $7 billion. “We have some decent momentum out there.”

General Motors Co. (GM) will report that adjusted earnings per share almost doubled to 89 cents from a year earlier, according to estimates compiled by Bloomberg. GM boosted prices and introduced 18 new or refreshed models last year as the automaker recovered enough from a 2009 bankruptcy to allow the U.S. Treasury to sell its final shares in the company in December. GM revenue may have risen 4.7 percent in the quarter.

Harsh Weather

U.S. auto sales rose only 0.3 percent in December as harsh weather kept away buyers from showroom floors. For 2013, sales increased 7.6 percent to 15.6 million vehicles, according to researcher Autodata Corp., the highest level since 2007.

Apple is projected to report its first gain on earnings per share in four quarters after consumers snapped up new iPads and iPhones for the holidays. Apple’s earnings per share for the quarter ended Dec. 31 have risen 1.6 percent to $14.03, according to the average estimate compiled by Bloomberg.

Amazon, which struggled to keep up with a crush of year-end orders, will report adjusted EPS of $1.15 for the quarter, up from 21 cents a year earlier, according to analysts’ estimates.

More Growth

Earnings growth for S&P 500 companies may continue to accelerate in 2014 as the U.S. economy improves and last year’s concerns about political squabbles that shut down the government in October dissipate, said Phil Orlando, chief equity market strategist at Federated Investors, which manages about $380 billion of assets. The U.S. economy may expand 2.6 percent in 2014, up from 1.7 percent last year, according to the median of economists’ estimates compiled by Bloomberg.

That earnings growth could underpin another 15 percent gain in the S&P 500 Index after stocks rose 30 percent last year, the best performance since 1997, Orlando said.

Estimates show fourth-quarter profit growth was led by industrial and consumer-durables stocks, along with the auto and auto-parts makers. Earnings from industrial companies such as General Electric Co. and 3M Co. are forecast to expand 13 percent as a group, while automakers may post a 30 percent gain, according to estimates compiled by Bloomberg.

European Recovery

Western Europe began growing again in the fourth quarter after the euro area’s economy declined year-over-year since the end of 2011, helping boost U.S. exports and industry, said Dean Maki, chief U.S. economist at Barclays Plc in New York. The European economy expanded 0.4 percent in the fourth quarter from a year earlier, according to estimates compiled by Bloomberg.

“Europe turning out of recession has had a significant effect on the U.S. manufacturing sector already,” Maki said in a telephone interview.

GE (GE), the world’s largest manufacturer of jet engines and diesel locomotives, may post a 20 percent increase in adjusted earnings per share to 53 cents as Chief Executive Officer Jeffrey Immelt expands the company’s industrial businesses and shrinks the lending unit, based on the average estimate.

Not all companies will post higher profit. JPMorgan Chase & Co. (JPM), which kicked off the earnings season yesterday as the first company in the Dow Jones Industrial Average to report results, posted a 7.3 percent decline in net income to $5.28 billion on $2.6 billion of settlements tied to Bernard Madoff’s Ponzi scheme. Litigation costs sapped $1.1 billion from fourth-quarter profit, the firm said.

Earnings at the banks in the S&P 500 Index may rise 1.9 percent in the quarter, according to estimates compiled by Bloomberg.

Earnings Shortfalls

High profit expectations for the quarter, coupled with last year’s outsized stock gains, may set up some companies for earnings disappointments that could send shares tumbling, said Matt McCormick, a money manager with Cincinnati-based Bahl & Gaynor Inc., which oversees about $10.5 billion.

McCormick pointed to shares of Facebook Inc. (FB), which doubled last year, and Twitter Inc. (TWTR), whose shares shot as high as $73.31 on Dec. 26 from its $26 debut in November.

“Expectations are sky-high,” McCormick said. “There are going to be more misses than people expect, and I think the stocks that miss are going to pay a pretty steep penalty.”

Facebook is projected to report adjusted earnings per share of 27 cents, up from 17 cents a year earlier. Twitter may report an adjusted loss of $15.5 million, or 2 cents a share, according to analysts’ estimates.

Some retailers, especially those targeting middle-class consumers, may report declining results. After heavy discounting failed to lure more shoppers during the holiday season, retailers including L Brands (LB) Inc. and Pier 1 Imports reduced profit forecasts last week.

Soft Retail

L Brands, which owns the Victoria’s Secret and Bath & Body Works chains, may post adjusted earnings per share of $1.63, down from $1.76 a year earlier, according to analysts’ estimates. Pier 1 Imports’ adjusted profit will drop 11 percent to $55 million, according to estimates.

“While bricks and mortar was probably soft, I think online is going to offset that,” Orlando said of retailers. Some stores may benefit this month and in February as consumers use gift cards received during the holidays, he said. December retail sales rose 0.2 percent after a 0.4 percent increase in November, according to a Commerce Department report yesterday.

Airline Profits

Flush travelers helped drive airline profits, with the six largest carriers forecast to post record combined net income of $1.2 billion for the quarter, nearly a 10-fold increase from $121 million a year ago, Michael Linenberg, a Deutsche Bank AG analyst in New York, said in a Jan. 9 note. More passengers and higher average fares helped drive a 6 percent revenue increase for the carriers to $35.1 billion.

Delta Air Lines Inc. (DAL), the largest U.S. airline by market value, is set to post adjusted earnings per share of 63 cents, according to analysts’ estimates, up from 28 cents a year earlier.

Rising employment and consumer confidence in the U.S. probably boosted medical procedures in the fourth quarter, helping orthopedics makers like Stryker (SYK) Corp. and hospital chains such as LifePoint (LPNT) Hospitals Inc. Estimates show Stryker may report net income rose 70 percent to $458 million and LifePoint’s adjusted earnings per share may rise to 81 cents from 76 cents a year earlier.

Wireless Data

The largest U.S. phone companies probably squeezed profit growth exceeding 10 percent out of their customers, even as sales showed moderate increases.

Higher charges for wireless data, which customers use to watch videos, listen to music and surf the Web, drove earnings at Verizon Communications Inc. (VZ) to rise an estimated 63 percent last quarter to 62 cents a share, excluding one-time items. Revenue rose 3.3 percent to $31.05 billion, according to estimates.

At AT&T Inc. (T), adjusted profit climbed to 51 cents a share from 44 cents, according to analysts’ estimates. Sales may rise 1.6 percent to $33.1 billion.

Amid the optimism, investors are still wary of how the Federal Reserve’s tapering of its economic stimulus program will affect interest rates and profits and how China’s focus on building a domestic economy may drag on growth, said Stapley of ClearArc Capital.

“We’re uncomfortably optimistic,” he said. “You’re finally starting to see some real milestones we had to have to form a foundation under the recovery.”

(Source: Bloomberg)