Bracing For 2 More DJIA Component Earnings (BAC, GE, AA, INTC, JPM)

Just yesterday with so many stocks hitting new 52-week highs, we noticed that 10 of the 30 DJIA components had hit new 52-week highs.  Two of those were Bank of America Corporation (NYSE: BAC) and General Electric Co. (NYSE: GE) ahead of both companies reporting earnings on Friday morning.  This is also on the heels of a not so hot Alcoa Inc. (NYSE: AA) report but after solid reports from Intel Corporation (NASDAQ: INTC) and JPMorgan Chase & Co. (NYSE: JPM).  That will make 5 of the 30 DJIA stocks out with earnings after this week.  We wanted to see what the changes in expectations have been for GE and B of A on Friday and how that compares to the DJIA components already out so far this week.

Alcoa, Inc. (NYSE: AA) is given a grade of a “C” for its report card and it is used by many (improperly by our take) as a proxy for earnings season starting.  The report was a disappointment: -$0.19 EPS and $4.9 billion in revenues, although the loss from continuing operations included restructuring and special charges of $295 million, or $0.19 EPS, so it hit the $0.10 estimate.  Thomson Reuters estimates were $0.10 EPS on $5.24 billion in revenue.  Poor revenues, particularly after bragging about price hikes, means things have not come back solidly yet.

Intel Corporation (NASDAQ: INTC) was given an “A-” for a report card grade after beating earnings and raising guidance, but ONLY because the stock has run so much and because expectations were higher than the consensus data.  If you look at a 52-week high yesterday and a new 52-week high today, that grade might seem like an “A+”… Shares are up over 3% today and over $24.20.  Analysts have a price target north of $27.50 on this one, so there is still room to run and its forward P/E for 2010 even after a 7%+ gain in the last two days is only about 13.5.

J.PMorgan Chase & Co. (NYSE: JPM) was a win on Wednesday after it beat earnings, although the grade here is a “B+.”  Trading helped its income beat expectations, and that is what the financial reform is trying to put a cap to. Other strong operations were still offset by credit losses.  The stock hit a 52-week high even with its credit card operations posting a loss.  To the average person, $3.3 billion in net income sounds monstrous. The issue here is deciding what is a fair multiple for 2010 and 2011 earnings… Dimon did punt on the issue of raising the dividend for now.

That being said, the DJIA components which already reported this week did set the bar higher for both Bank of America Corporation (NYSE: BAC) and for General Electric Co. (NYSE: GE).  Both report on Friday morning.

Bank of America Corporation (NYSE: BAC) has Thomson Reuters has estimates of $0.09 EPS and $27.90 billion in revenues, although the official EPS figure did not raise while the revenue figure did. Shares hit a new 52-week high again this morning of $19.83, up from $18.59 last Friday.  JPMorgan’s earnings steered this one higher.  This is the first real quarter under Brian Moynihan as its new CEO, so this unfortunately may still have a lot of the “getting to know you” pleasantries and the notion of continuing to execute on its strategy rather than anything exceptionally new or enlightening.  We could go all through the metrics here, but the assumption now is that B of A will have to blow out the earnings or its stock needs a breather.  Late morning options trading indicates that traders are braced for a move of up to $0.60 or so in either direction, which is just over another 3% either way.  Keep in mind that its 52-week low is $7.00 and the absolute lows in March and February 2009 were under $3.00.  The average analyst price target is over $21.50 now.

General Electric Co. (NYSE: GE) is the Big Kahuna as far as the overall economy.  Thomson Reuters has estimates of $0.16 EPS and $37.10 billion in revenues, which are effectively the same as earlier in the week after there have been surprisingly few analyst changes so far.  Estimates next quarter are $0.25 EPS and $38.87 billion in revenue.  With earnings estimates of $1.02 EPS for 2010 and then $1.24 EPS for 2011, the translation is that the stock at $19.60 and at a new 52-week high today is no longer cheap unless there is a significant beat on earnings and a raised guidance bias.  By our take, GE’s common stock will have to see stronger earnings or investors may get one more shot at getting in at a lower share price.  We still expect its dividend to be raised, although the pressure is not that high on GE to do so and it could wait until its annual meeting later this month or out closer to 2011 as CFO Keith Sherin said.  As far as stock options, the traders seem braced for a move of up to $0.75 or so in either direction.  The average analyst price target on GE is just over $20.00, so we expect the analysts either to make target price adjustments or for thee stock to make price adjustments.  The 52-week low is now “only” $10.50 but the absolute lows in early 2009 were actually under $6.00.

The bias has already been set for earnings season.  We are not of the opinion after the great share run-ups that Joe Public finally moving out of bonds and into stocks to chase higher and higher share prices.  That is not reason enough to believe that meeting expectations is good enough.  “Upside and raised guidance” is the combination to expect, otherwise some small punishment needs to come into play.

JON C. OGG