The first week of earnings season brought mixed results from many bellwethers and did not help to give the market any direction heading into the third quarter. The financials sector took a hit with Citigroup and Bank of America both reporting weak revenues numbers while Internet and consumer sectors also slumped on the back of poor outlooks for the rest of 2010. The semiconductor industry was one of the few winners from week one, with Intel announcing strong guidance and posting record quarterly profits. With the mixed results from week one, investors put a variety of big names under the microscope last week in order to give the choppy market some direction going forward. Some of the key companies reporting included Goldman Sachs, Johnson & Johnson, Apple, and Halliburton which overall produced a slightly more upbeat outlook which helped to send the market higher on the week [see ETF Winners And Losers From First Week Of Earnings Season].
Although most companies managed to beat their earnings estimates, a fair amount of the firms that reported solid earnings saw their share prices fall dramatically. This was due to a lack of top-line growth which suggested to many investors that companies were unable to grow their operations and were only beating estimates on the back of cost-cutting. This caused a sell-off in a variety of companies ranging from Amazon.com to Netflix which both saw their shares decline by more than 9% after their less-than-stellar revenue figures were reported. Despite this weakness in the e-commerce sector, many other sectors reported strong results last week suggesting that some may be able to avoid a double-dip while other sectors appear to still be mired in recession. Below, we profile some of the biggest winners and losers from the second week of the summer earnings season:
Winner: Energy
Halliburton reported very strong earnings, blowing the Street’s estimates out of the water. The company reported EPS of $0.53 and revenues of $4.39 billion; while analysts expected profits of $0.37 a share and revenues of $4.09 billion. This came despite the company’s ties to the disaster at the Deepwater Horizon rig and the offshore drilling ban which could severely cut into Halliburton’s core business. However, thanks to high levels of demand for natural gas drilling onshore, Halliburton’s outlook remains bright despite the shutdown of the Gulf to new drilling. Compared to the same period last year, Halliburton’s profits were up approximately 83%, a fact which sent shares of the company soaring higher last week.
These promising results had the heaviest effect on the Merrill Lynch Oil Service HOLDR (OIH), which has a 11.4% holding in Halliburton. Along with Halliburton, OIH allocates high percentages to other oil service giants like Schlumberger and Transocean. The fund is mostly domestic, with only 12% of its assets in companies based outside of the U.S. [see more on OIH's holdings here]. OIH reaped the benefits of Halliburton’s strong reports on Tuesday, as the ETF shot up upon the release of the robust quarterly results [also see Are Energy ETFs Now A Buy?].
Winner: Technology
Overall, the technology sector did well this past week with Apple crushing reports, and Microsoft reporting positive earnings as well. Analysts had predicted Apple to report revenues of $14.75 billion and EPS of $3.11; the company beat those marks with ease, reporting revenues of $15.7 billion and EPS of $3.55. Microsoft also beat their marks by reporting revenues of $16.04 billion and EPS of $0.51, compared to analyst consensus of revenues of $15.2 billion and EPS of $0.46 [see Tech ETFs In Focus As Apple (AAPL) Reports Earnings].
iShares Dow Jones U.S. Technology Index Fund (IYW) has the largest ties to these two companies, with Microsoft (11.9%) and Apple (9.6%) coming in as the top two holdings for the ETF. The diverse ETF holds 170 securities, with a focus on three technology segments: hardware (57.4%), software (27%), and telecom (13.7%) [see IYW's performance charts here].
Mixed: Financials
Morgan Stanley sparked some life into the financial industry by posting healthy results for their most recent quarter. The company reported EPS of $0.80 (after discontinued operations were excluded) and revenues of $7.95 billion compared to Street expectations of $0.37 in profits and revenues of $7.93 billion. On the other side of the financial field, Goldman Sachs disappointed investors by reporting profits of only $0.78; analysts had predicted that the company would report EPS of $2.01, a night and day difference from their actual earnings. Overall, Goldman’s profits decreased 82% year over year despite continued solid performance from their investment banking segment [see Goldman Sachs Fraud Crushes Financial ETF (XLF)].
The ETF impacted the most by these two reports was the iShares Dow Jones U.S. Broker-Dealers Index Fund (IAI). The fund holds both Goldman Sachs (10.4%) and Morgan Stanley (8.4%) as its top two holdings. This pure U.S. financials play ETF spreads its assets out over firms of all market cap sizes, favoring medium sized companies (32.4%). This ETF saw an approximate gain of 4% from its open Tuesday to its open Wednesday, but overall has been up and down all week thanks to negative testimony from Fed Chair Ben Bernanke on Wednesday [see IAI's fact sheet here].
Loser: Pharma
Johnson & Johnson gave their long awaited earnings report after a quarter plagued by recalls created anxiety for investors and damaged JNJ’s golden brand name. Despite the heavy recalls, J&J squeaked by their estimates for the previous quarter. The company reported EPS of $1.21, just barely beating the expectation of $1.208 thanks to a 7.5% increase in income for the quarter. However, the company lowered their outlook for the rest of 2010 due to continued concerns over the impact of the drug recalls. This lowered guidance sent shares tumbling and tarnished an otherwise positive day for the company [see more at Troubles At Johnson & Johnson Infect PPH].
The Merrill Lynch Pharmaceutical HOLDR (PPH) has the heaviest ties to JNJ, with over 25% of the fund’s assets dedicated to the pharma giant. Holding just 16 securities, this fund relies heavily on just a select number of pharma firms, which ensures that PPH is among the most volatile funds in the Health & Biotech ETFdb Category. Upon the release of the negative outlook from J&J, PPH fell roughly 1.5% [see all of PPH's fundamentals here].
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Disclosure: No positions at time of writing.
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