Earnings Gains Seen On Q4 Sales Pickup And Reduced Costs

The fourth-quarter earnings season, which officially kicked off Monday with Alcoa, should offer a bagful of goodies for investors interested in robust bottom-line gains.

For that they can thank a dismal performance the prior year, when the global financial crisis sent corporate earnings on a swift downward spiral.

Easy comparisons should help S&P 1,500 firms post triple-digit profit growth in Q4, according to analysts at Standard & Poor's.

Zacks Investment Research expects S&P 500 companies to log 86% median earnings growth.

But those gains should be taken with a grain of salt, watchers say.

"The S&P 500 will have a remarkable year-over-year earnings performance, because everything was really in the toilet a year ago," said Dirk van Dijk, Zacks' chief equity strategist.

Financials, Autos Lead

Much of the Q4 gain will come from rebounds in the financial and auto sectors, van Dijk says. Both should return to profitability after huge losses a year earlier. He also expects the construction sector to post a much-smaller loss.

But the picture is a little fuzzier on a sequential basis. Zacks expects Q4 profit to fall 11.4% from Q3. But Q1 2010 earnings are expected to rise 20.4% sequentially.

Van Dijk doesn't trust either of those numbers.

"I'd say the Q1 sequential numbers are overstated and the Q4 sequential numbers are understated," he said. "In reality I expect the Q4 numbers to be about flat with Q3, and the Q1 sequential growth to be less than projected."

Alec Young, equity strategist with Standard & Poor's, says Q4 earnings should get a big boost from the energy and materials sectors. He credits rising commodities prices and easy comparisons.

Tech profits should more than double, S&P says. But telecom earnings are expected to be flat while industrial earnings decline.

Like van Dijk, Young expects much better year-over-year results from financials. Still, recent developments have raised a red flag.

"Analysts have actually been cutting their views on financials the last few weeks, so there's some nervousness there," Young said. "The big wild card is loan loss provisions. Everyone is hoping those will come down. But financials are still the best-performing sector (through Jan. 11)."

Revenue Heading Up?

With just about everyone looking for big Q4 earnings growth, the real story might lie in other metrics such as top-line growth.

S&P expects 7% revenue growth for Q4. If so, it would be the first quarterly gain in more than a year. Corporate revenue fell 6% in Q1 2009, 10% in Q2 and 6% in Q3.

"The better-than-expected earnings the last couple of quarters were very much driven by cost cuts," Young said. "Now people are looking for revenue growth. Even a little bit of revenue growth would translate into more earnings growth than normal. And you'd want to see it continue in April because the comps then will be a little harder."

Zacks projects 1.4% revenue growth for S&P 500 firms in Q4. That would be a big improvement from Q3, when revenue fell 11.4%.

"Given all the cost-cutting going on, the prospect of revenue growth leaves open the possibility of good upside earnings surprising," van Dijk said. "There should be huge margin expansion. I can see lots of stuff falling to the bottom line."

He'll be keeping a close eye on how companies fare vs. Wall Street forecasts. After Monday's close, Alcoa (AA) reported a 1-cent-a-share profit ex items, missing views by a nickel. Sales fell 4%, far less than the expected 15% drop. But Alcoa shares sold off 6% in late trade.

Because year-over-year results are so skewed, van Dijk figures a lot of experts will pay attention to how companies do vs. two years earlier.

"They'll be looking at the Q4 2007 numbers more closely than they normally would," he said.

Intel (INTC) will post Q4 results late Thursday. JPMorgan (JPM) is set to release its report Friday morning.