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Earnings Action
By Steven Lord
This week, the market is going to be focused on earnings, plain and simple. Several major blue-chip firms are set to report this week, and we should be getting a good handle on the state of the U.S. economy during the final months of 2006. Not all earnings reports are equal, you know. The ones this time of year - in which companies report not only the final quarter but also (usually) full-year results AND expectations for this year - are among the most important for setting the market's overall tone. Among the major reports today will be Texas Instruments, CSX, Eaton Corp. and American Express, giving us critical insights into the semiconductor, freight and finance industries. Later this week, we will hear from a whole slew of firms - Microsoft, Dupont, several homebuilders (that should be interesting), Yahoo, Wachovia, Abbott Labs, Honeywell, and most of the airlines - and their results will more or less determine whether we stay perched at record levels or whether we undergo a correction.
I mention the airlines because they have been somewhat under the radar (no pun intended) for the last several months. Interestingly, while oil skyrocketed you could barely pick up a copy of the Wall Street Journal without reading about the incipient demise of the airline industry. And I admit the skies were cloudy for a while - most U.S. airlines barely made it through the post-9/11 period, while immense demands for security cost them enormous amounts of money. But as oil has dropped over the past six months, Street interest in the airlines has literally disappeared. It reminds me of when traffic jams ease once the accident scenes are cleaned up...
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The effect of a recent drop in oil has been like handing the airlines a check. It is their greatest expense, accounting for around 30% of the average airline's cost structure. And some of the major airlines - AMR's American Airlines, for instance - actually posted a profit last quarter and have seen their stock prices rise. Some, however, seem stuck in the mud, including AirTran Airways, Jetblue and Southwest. Their prices are all at or relatively close to the same levels of a year ago, or in the case of Airtran, below them. This is ironic, since these three are the success stories of the group - the fastest growing, lowest cost carriers in the industry. Their leverage to a lower oil price is huge, since their cost structure is so lean everywhere else and they are adding additional routes as fast as they can. While the airline industry is easily one of the quirkiest and hard to understand in the stock market, it seems like the fourth-quarter and full-year reports for these three companies can't help but meet or exceed estimates. It might make sense to trade accordingly.
Best regards,
Steven Lord, Editor, GRESSOR