The Silver Lining of Lower DJIA Earnings (CAT, KO, DD, IBM, MRK, UTX)

There have been some pretty poor reports on earnings from DJIA components such as Caterpillar Inc. (NYSE: CAT), The Coca-Cola Company (NYSE: KO), EI DuPont de Nemours & Co. (NYSE: DD), International Business Machines Corp. (NYSE: IBM), Merck & Co. Inc. (NYSE: MRK), and United Technologies Corp. (NYSE: UTX).  But there may be a flip-side here for the ultra-bullish traders.  These estimates are being lowered to extreme levels and the bar may be set very low for the future.

Caterpillar Inc. (NYSE: CAT) posted a net loss after items and that marks the first loss since 1992, but the ex-items earnings was $0.39 EPS vs. $0.04 estimates.  The company lowered guidance again significantly for 2009 based on the mid-point of revenues. Estimates were put at $1.25 EPS vs. $1.77 estimates. The earnings estimate for 2009 was over $4.30 EPS not even 90 days ago.  Shares were down 5% at $28.86, but now they are down only 0.5% at $30.30 so far.

The Coca-Cola Company (NYSE: KO) met earnings at $0.65 EPS, but that was lower than before with a drop of 2% in case volumes.  Operating revenue was also down almost 3% at $7.17 billion. We would also keep an eye open to see if ‘Coke’ makes comments about the bottling roll-up from rival Pepsi.  Shares are down 1.1% at $43.82.

EI DuPont de Nemours & Co. (NYSE: DD) is another disappointment as the chemicals giant posted a 59% drop in net income, and it lowered guidance.  Technically, this was $0.54 EPS vs. $0.52 estimates.  Even after all of the cost cuts, it is going to try to trim out another $1 billion in expenses for 2009.  For 2009, it sees $1.70 to $2.10 EPS vs. $1.88 estimates, although that is before items.  Not even 90 days ago, the 2009 estimate was $2.24 EPS.  Shares were down almost 3% at $26.00, but shares have now recovered to $27.23 and are up this morning.

International Business Machines Corp. (NYSE: IBM) posted earnings last night at $1.70 EPS vs. $1.66 estimates.  It also ended with about $126 billion in backlog and reiterated guidance for 2009 and said it was starting to see some long-term tracking to $10 to $11 EPS for 2010 vs. estimates of $9.78 EPS.  The issue is that revenues were light and the stock was up about 20% since the March lows.  Shares were down about 2.5% at $97.88, but they have just gone positive this morning.

Merck & Co. Inc. (NYSE: MRK) managed to disappoint this morning with $0.74 EPS vs. $0.77 EPS estimates.  Revenues were down 7.5% at $5.39 billion vs. $5.77 billion estimates.  The company also brought down revenue targets for 2009 and put earnings in a range of $3.15 to $3.30 EPS vs. $3.25 estimates. To add to matters, Merck said that Telcagepant will not be submitted to the FDA for approval this year.  Earnings estimates were $3.29 about 90 days ago.  Shares were down 5% at $23.95 at the open, and now are down about 8% so far.

United Technologies Corp. (NYSE: UTX) is the only positive so far this morning for DJIA components as it managed to meet earnings expectations with $0.78 EPS, and revenues were down over 12% to $12.25 billion rather than $12.4 billion expected.  Be advised there were items in the earnings number.  The defense and manufacturing conglomerate reaffirmed its $4.00 to $4.50 EPS range for the year, with estimates at 4.20 EPS; and it put revenues at $55 billion vs. $54.2+ billion estimates.  Estimates for 2009 were $2.75 EPS just 90 days ago.  Shares were actually up almost 3% at $47.26 on the news early on, but now they are up over 4% at $47.65 and have traded even higher.

We do not look at any of this as good news in the classic sense.  ‘Good’ is just too liberal of a term.  But what may be worth pointing out is that these numbers have all come down so far for 2009 that it still seems as if the bar is being set extremely low for now and for ahead.  We are in a recession, and the question will boil down to whether we see a recovery late this year or whether it gets delayed into 2010.

Many companies have very low business inventories now, and production has generally slowed to a rate that is slower than consumption and shipments.  So unless there are nothing but returns to business inventories from customers, any uptick later this year might just force the recession impacts to get cut short.  True bulls from these levels won’t be waiting for the good news, because by then it is too late and the stocks will have likely run.  Sometimes “less-bad” has to be sufficient.

Jon C. Ogg