Monday, July 27, 2009

Early Week (or Weak) Earnings

In scanning the news wires this morning, I'm seeing earnings from Aetna, Honeywell and Verizon that stand out. Let's take a quick peek at the first two.

First, health insurer Aetna, gives us a very timely look into costs in the health care industry. (Reuters):

Aetna Inc sharply cut its full-year earnings forecast on Monday because of higher-than-projected medical costs as the health insurer posted a 28 percent drop in second-quarter net income.

The No. 3 U.S. health insurer, whose shares fell 7.7 percent in thin premarket trading, expects 2009 operating earnings of $2.75 to $2.90 per share. In June, Aetna lowered its full-year outlook to $3.55 to $3.70 per share from an initial forecast of $3.85 to $3.95.

Second-quarter net income fell to $346.6 million, or 77 cents per share, from $480.5 million, or 97 cents per share, a year earlier. Revenue rose 10 percent to nearly $8.7 billion, compared to the analyst estimate of about $8.6 billion.

Aetna said higher medical costs stemmed from use of more services in the emergency room, laboratory and preventive services, which is a continuation of
issues cited earlier this year. "We continue to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behavior in the face of a deep recession," Chief Executive Officer Ron Williams said in a statement. "We did not fully capture the impact of these forces in our 2009 pricing."

Ok, bright side, revenue's were up year over year. But at what seems to be a funny coincidence in its timing, Aetna says increased medical costs are hitting them hard. Medical cost now represent I believe 1/6 of our nation's spending, and it is likely to continue without some type of reform. They cut their full year guidance by quite a bit, and the stock is getting a haircut in the premarket.

Also reporting this morning is large industrial manufacturer Honeywell. (Reuters).

Diversified U.S. manufacturer Honeywell International Inc reported a 38 percent drop in earnings that matched Wall Street's forecasts and cut its full-year profit forecast to the bottom of its prior range.

The world's largest maker of cockpit electronics, which is facing a coordinated downturn in its core aviation and construction markets, said on Monday it expects no economic recovery this year.

Honeywell now looks for full-year earnings of $2.85 per share, at the low end of its prior forecast of $2.85 to $3.20. It cut its revenue forecast to $31.5 billion, below its prior range of $32.3 billion to $33.2 billion.

"Economic conditions ... remain challenging and we are not planning for any recovery in 2009," said Chairman and Chief Executive Dave Cote, in a statement.

Revenue at the Morris Township, New Jersey-based company fell 22 percent to
$7.57 billion.

Pretty weak results here. Revenue down 22 percent. Again, I've been looking hard at revenue numbers as those are one of the best indicators as to just how much activity has decreased. The bottom line is being overlooked as cost-cutting measures are being used to save money and to meet analyst expectations. Their CEO said they aren't planning on any recovery in 2009. Not sure if CNBC is going to cover that statement, but we need to listen to what these companies have to say.

The market was quite strong last week, and this week should be a good test. Can the market hold its gains without as many potential catalysts (earnings results)? If it can, it will bode well for a more prolonged move up as we move into August.

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