What Will 2006 Earnings Be Like?

This weeked, Barron’s had an interesting article about upcoming 2006 earnings. Despite its upbeat title (Piling Up the Profits), it managed to avoid the breathless hype we sometimes see from the fundie crowd. Here’s an excerpt:

"To some extent, earnings in the fourth quarter were saved by the energy sector; it is expected to show a 46% gain from a year earlier. Without energy’s contribution, the S&P 500′s expected earnings growth would have been 9% in the quarter. The group owes much to the devastating storms of last summer, which sent oil and gas prices soaring. And one of the biggest forces behind the earnings surge was Exxon Mobil (XOM), which is expected to contribute more than $10 billion of operating income in the fourth quarter, or 35% of the entire sector’s earnings, notes Howard Silverblatt, equity market analyst at Standard & Poor’s. Indeed, for the last quarter of the year, the industry titan will contribute 5.5% of the earnings for the entire S&P 500.

This situation could reverse dramatically in 2006, with the energy sector facing tough year-over-year comparisons and eventually becoming a drag on the broader index’s earnings growth. In both the third and fourth quarters of this year, the S&P 500 should earn roughly 14%, analysts maintain — but without the energy sector, the growth would be closer to 17%.

Some other sectors of the economy should compensate for energy, thanks in part to stronger capital spending by their customers. In all, S&P 500 companies boosted capital spending in the third quarter by 24%, according to Thomson Financial, and the spending is expected to continue."

That’s a long over due Capex spike in Q3; If it ramps up and continues, it bodes well for the economy in 2006.


Several issues we’ve touched upon in the past are present; the impact of energy, share buybacks, and option expensing.

"Going into 2006, there are two new wrinkles to watch closely. First the Financial Accounting Standards Board now requires companies to expense options if their fiscal periods begin after June 15, 2005. Because many companies already comply with the rule or have switched from granting options to granting restricted stock, the impact won’t be huge. But the rule will nick earnings in the technology group by one or two percentage points, says Mike Tompson, Thomson Financial’s director of research.

Second, watch for stock buybacks to lift earnings per share, by reducing the number of shares outstanding. S&P believes that companies repurchased a hefty $315 billion of stock last year, boosting earnings per share in the fourth quarter by 1.7 percentage points.

If the quarter’s earnings come in as strong as analysts expect, the impact of buybacks probably will be ignored amid the jubilation. But if earnings disappoint and investors start combing through press releases more carefully, worries could mount about the heavy contribution of buybacks. So don’t reach for the bubbly just yet."

UPDATE January 15, 2005 12:33 pm

The Naybob rounds up all of the recent comments on Options Expensing Impact


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Barron’s MONDAY, JANUARY 16, 2006   

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