Zacks Earnings Preview: AutoZone, Applied Materials, Costco, Heinz and Medtronic

CHICAGO, May 23, 2011 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes: AutoZone (NYSE: AZO), Applied Materials (Nasdaq: AMAT), Costco (Nasdaq: COST), Heinz (NYSE: HNZ) and Medtronic (NYSE: MDT).

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Mopping Up Earnings Season

Earnings season is starting to wind down, with just a few stragglers left. A total of 99 firms are due to report, including 13 from the S&P 500. Mostly we are down to the retailers, many of which have fiscal period ends a month later than everyone else.

The firms reporting this week include AutoZone (NYSE: AZO), Applied Materials (Nasdaq: AMAT), Costco (Nasdaq: COST), Heinz (NYSE: HNZ) and Medtronic (NYSE: MDT).

It will be an average week for economic data. We start off with New Home Sales and Durable Goods orders on Tuesday, followed by the second look at first quarter GDP on Wednesday, and finish up the week on Friday with data on Personal Income and Spending, as well as the Fed's favorite measure of inflation, the core PCE index.

Monday

Nothing of significance.

Tuesday

New Home Sales are expected to remain at the 300,000 rate they were at in March. That is simply a pathetic level, even if it is slightly off the record low set in January. The records go back to the Kennedy administration. If we do come in at 300,000, that is still lower than any month prior to 2010. Unlike used home sales, each new home sold represents a lot of economic activity. Thus this is a very important report. Normally, new home sales are what leads the economy out of recessions, but they have been a huge drag this time around.

New Orders for Durable Goods are expected to drop by 2.0% after rising 2.5% in March. Previous months are often revised significantly for this data, and the recent trend has been for upward revisions, so it would not be surprising to see March revised up to about 2.9%. Much of the weakness expected comes from the highly volatile transportation equipment segment. Since they are so high priced, a few orders for jetliners can really push around the total number, but the orders tend to be lumpy. Excluding transportation equipment, new orders are expected to rise 0.6% down from an increase of 1.3% last month. Thus, with the exception of transportation equipment, things are slowing down, but not headed down.

Wednesday

The second look at GDP growth in the first quarter is released. The initial read was a disappointing growth rate of just 1.8%, down from growth of 3.1% in the fourth quarter. The consensus is looking for a slight upward revision to 2.0% growth. That is still quite anemic, particularly coming out of a deep recession. The composition of the growth rate is just as important as the overall growth rate itself. Growth that comes from the build-up of inventories for example is of much lower quality than business investment in new equipment and software. We will provide a complete breakdown of which parts of the economy are adding to growth, and which are serving as brakes on economic growth, and how the contributions have changes since the first look at the numbers last month.

Thursday

Weekly initial claims for unemployment insurance come out. They had a very nice decline early in they year, but then had a very rough month or so in March and April. The last two weeks have been much more encouraging. Last week they fell sharply, by 29,000 to 409,000. A further decline is expected next week, getting us back below the psychologically important 400,000 level. The four week moving average will probably stay well above the 400,000 level.

Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 81,000 to 3.711 million. That is down 937,000 from a year ago. I would expect a decline this week. The consensus is looking for a level of 3.700 million. Some of the longer-term decline is due to people simply exhausting their regular state benefits, which run out after 26 weeks. Those however, don't last forever either. Federally paid extended claims rose by 4,000 to 4.109 million, and are down by 1.278 million over the last year. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 7.937 million, which is down 47,000 from last week (there are some timing issues so the change in continuing and existing claims does not exactly match the change in the total). The total number of people getting benefits is now 2.120 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity, finding a new job, and how many have left on the road to poverty, having simply exhausted even the extended benefits. Given the differential between job growth and the decline in total people getting benefits, it looks like about 1 million people have simply run out of benefits, and have not found new work. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

Friday

Personal Income is expected to have increased by 0.4% in April, down from a 0.5% increase in March. This is a broad measure of income, not just wages and salaries. The composition is important, as over the last year or so, much of the growth in income has come from transfer payments, not from wage growth. Personal Spending is expected to have slowed to an increase of 0.5% from 0.6% last month. That is still more than the increase in income -- meaning some more downward pressure on the savings rate. A falling savings rate boosts the economy in the short term, but a low savings rate is not healthy over the long term. The U.S. still has a very low savings rate relative to both history and the rest of the world, although it is significantly higher than it was a few years ago.

The University of Michigan consumer sentiment survey is expected to be unchanged at 72.4. That is a lot better than where it was a year ago, but not exactly a robust reading.

Dirk Van Dijk, CFA, is the Chief Equity Strategist for Zacks.com.

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Contact: Dirk Van Dijk, CFA
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