2011 Q1 Earnings Analysis: LPL, J.P. Morgan Strategists Eye Finance Sector

Two weeks into first-quarter 2011 earnings season, a pattern has started to emerge: it's all about slow, post-recession rebuilding.

Chief strategists and investment officers say that while Q1 2011 is shaping up to set records for earnings-per-share profits, earnings surprises have nevertheless been subdued, and this quarter has been a slow one in terms of gross domestic product growth.

S&P 500 earnings per share for the first quarter of 2011 may set a record as the highest first-quarter EPS in history, predicted Jeff Kleintop, chief market strategist for LPL Financial in an April 11 earnings preview. But Kleintop added that corporate profits have slowed as businesses have stepped up spending on materials, capital and labor.

"For the S&P 500 companies as a whole," Kleintop (left) wrote, "the consensus of analysts' estimates points to average earnings per share growth in the first quarter of 2011 of 13% from one year ago, not much above the 8% growth rate of sales, as the rise in profit margins has slowed as businesses have stepped up spending on materials, capital and labor."

So far, financial services companies of greatest interest to advisors that have reported earnings are Bank of America Merrill Lynch, Bank of New York Mellon, BlackRock, Charles Schwab, Citigroup, Goldman Sachs, Janus, JPMorgan, Morgan Stanley, Raymond James, TD Ameritrade, T. Rowe Price and Wells Fargo.

Looking at the Finance sector's performance, J.P. Morgan Asset Management Chief Strategist David Kelly said Q1 2011 was a slow quarter in terms of GDP growth, which clocked in at about 1% to 2% for the quarter.

"Growth is not strong right now, but for financial companies, it appears to have been strong enough," Kelly (left) said. "What's helping financial companies is a continued recovery from the financial crisis and the recession, which is bringing down delinquency rates and write-offs, and that is improving net income. There isn't much loan growth, but there is an improvement in loan performance."

Kleintop's LPL colleague, Chief Investment Officer Burt White, said in an April 21 phone interview that he was seeing subdued earnings surprises in the first days of the Q1 2011 reporting season.

"In the first 10 days of earnings season, we were getting about 80% of companies beating expectations, and an 80% to 85% range is what we've seen in the last six to seven quarters, so that's in line. But the earnings surprises were much lower," White said. "Through the first

10 days of this earnings season, the beat was more like 1%. So companies were still beating, by a relatively large percentage, but not by a big margin. They were beating, but barely. The market didn't like that very much."

However, average earnings surprises by April 21 seemed to have lifted to percentage beats of 5% to 7%, White noted.

"My view is that the first few companies that came out were outliers, and now as we're getting into the heart of earnings season, you're starting to get the true theme of earnings. I think earnings are going to continue to come in very strong. We think 80% to 85% of companies will beat expectations, and we think the earnings surprise will be in the 3% to 6% range," White said.

In addition, Kelly predicted that dividend payments will continue to increase.

"I think companies have been hoarding cash, and they are beginning to lay out that cash in the form of more mergers and acquisitions activity, more stock buybacks, and more dividends," he said. "The important thing for investors is that a lot of that money gets recycled back into the U.S. stock market, and that's generally positive for stocks overall."

Taking a closer look at individual company performance, White said that the first two finance companies that reported, JPMorgan and Bank of America, suffered slow loan growth.

"Consumer and industrial demand for loans is slow and disappointing," he said. "We're not seeing as much demand for loans, and while it's improving a little bit, it's certainly not enough to drive earnings for companies like JPMorgan and Bank of America."

As for Goldman and Morgan Stanley, both were helped by their trading businesses, White said.

"Fixed income trading has been through the roof, and that part of the operations has done extremely well," he said. "On the downside, equity trading has been a little bit disappointing, and investment banking has been a little bit disappointing, especially where we are in the cycle relative to expectations. It's a mixed bag in both companies. They came out with decent results, but nothing that was gangbusters and a massive surprise to the upside."

In the asset management group, BlackRock, T. Rowe Price and Legg Mason saw good numbers, and they will continue to be good, White predicted.

"You've really seen that what's driving their business is the profitability on the fixed-income side of the house and some of the alternative investment side of the house," he said. "Second place to be are the custodians—those have done decently well, Bank of New York Mellon and others."

For more information on earnings read AdvisorOne's 2011 Q1 Earnings Calendar for the Financial Sector.

2011 Q1 Earnings Analysis: LPL, J.P. Morgan Strategists Eye Finance Sector

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2011 Q1 Earnings Analysis: LPL, J.P. Morgan Strategists Eye Finance Sector

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