Energy and utilities face the earnings gauntlet

Several big quarterly reports will shed some light on 2 sectors that have soared this year.

By MSN Money Partner Apr 28, 2014 3:52PM
Caption: Oil & gas drilling rig derrick
Credit: © William H. Edwards/Getty ImagesBy Wallace Witkowski, MarketWatch

Energy and utilities stocks will face a crucial test this week with several big earnings reports due from sector heavyweights ExxonMobil (XOM), Chevron (CVX) and Dominion Resources (D).

Both utilities and energy stocks have been the best performers for the quarter and year, even as the broader market has struggled to find direction. The Dow Jones industrials ($INDU) declined 0.3 percent last week and is down 1.3 percent for the year. The Nasdaq Composite Index ($COMPX) fell 0.5 percent last week for a 2.4 percent deficit on the year. Only the Standard & Poor's 500 Index ($INX) is showing a gain on the year, up 0.8 percent, as it finished down less than 0.1 percent last week.

The utilities and energy sectors added to their gains for the quarter and year last week. Utilities stocks are up 4 percent for the quarter as of Friday and 13 percent for the year, while energy stocks are up 4.4 percent for the quarter and 4.6 percent for the year.

With quarterly reports out from Dow energy components like ExxonMobil on Thursday and Chevron on Friday, investors will be combing outlooks for evidence of the economic recovery, said Robert Pavlik, chief market strategist at Banyan Partners.

"If the economy is improving you want to hear that demand is improving,” said Pavlik. “You want to hear positive comments."

Outlooks this earnings season, while still more negative than average, are slightly less negative than they were halfway through the previous season. Of the 51 S&P 500 companies that have offered a profit outlook, 36, or 70 percent, have guided below the Wall Street estimate at the time, according to John Butters, senior earnings analyst for FactSet, in an note Friday. While that’s above the 5-year average of 65 percent, it's below the 81 percent seen at the end of January.

Nearly half the companies in the S&P 500 have already reported this earnings season with more than 130 companies reporting in this week. By market weight, 58 percent of the energy sector and 66 percent of the utilities sector will be reporting this week, according to Goldman Sachs data.

The energy sector faces a tough road. Already the sector with the worst expected earnings decline this season, results have yet to even clear those low marks. The energy sector was expected to post an earnings decline of 7.6 percent. Results so far are showing a 9 percent decline.

Given the weak earnings outlook, some investors are saying the recent spike in energy stocks and exchange-traded funds like the Energy Select Sector SPDR (XLE) is a classic late-cycle play in an aging bull market. Others see it as a smart bet because of innovation in the industry and higher crude-oil and natural-gas prices. Those higher prices, however, slipped this past week with oil seeing its worst weekly drop since mid-March and natural-gas prices down 2 percent on the week.

Banyan's Pavlik said he's more interested in how oil-field services companies are doing this season seeing that firms like Baker Hughes (BHI) topped earnings expectations recently.

"Now that most of the large shale plays have been found, there’s been a drop off in production," Pavlik said. "So, [exploration and production companies are] going to be searching for more types of these wells."

Energy-services companies reporting this week include National Oilwell Varco (NOV) and Ensco PLC (ESV). Other energy earnings this week include ConocoPhillips (COP), Valero Energy (VLO), Hess (HES), Phillips 66 (PSX) and Marathon Petroleum (MRO).

High-flying utilities have less pressure to impress

Similarly, inflows into utilities stocks and ETFs like the Utilities Select Sector SPDR (XLU) are also being eyed with suspicion, since the high-dividend stocks act as bond proxies that will likely falter the closer the Federal Reserve gets to hiking its federal funds rate.

Utilities, however, appear to be less under the gun as earnings so far have outperformed expectations with a gain of 15.2 percent, compared with an expected 7.6 percent at the end of the quarter. Still, that was only with 13 percent of the sector’s weight reporting. Remember, 66 percent of the sector's weight reports this week.

Big names in utilities reporting include Dominion, Southern Co (SO) , NextEra Energy (NEE), Exelon (EXC), Edison International (EIX), PPL (PPL), PG&E (PCG), Public Service Enterprise Group (PEG) and Sempra Energy (SRE). 

Earnings from Merck, Twitter, Time Warner

Other earnings reports due this week include Dow component Merck & Co. (MRK) on Tuesday. Health-care earnings are also due from Bristol-Myers Squibb (BMY), Espress Scripts Holding (ESRX), Boston Scientific (BSX), WellPoint (WLP) and Cardinal Health (CAH).

Other notable earnings reports this week include those from Twitter Inc (TWTR), LinkedIn Corp (LNKD), eBay (EBAY), Time Warner (TWX), MasterCard (MA), Viacom (VIA), Expedia (EXPE), Kraft Foods (KRFT) and CVS Caremark (CVS).

With nearly half the S&P 500 having already reported, the earnings growth rate has finally broken back into positive territory with a gain of 0.2 percent, following a reading of a 2 percent, decline as little as a week ago. At the beginning of the year, first-quarter earnings were forecast to grow by more than 4 percent, though those estimates fell over the quarter as winter weather hurt businesses.

On average, companies have been beating Wall Street earnings expectations in line with the four-year average of 73 percent, and earnings surprises have been fairly consistently rewarded and punished by investors, according to FactSet's Butters on Friday.

More from MarketWatch
Apr 28, 2014 4:28PM

"Both utilities and energy stocks have been the best performers..."

Well there was 15%-20% rate increase this year. Think maybe THAT has something to do with it????

Moron... Oh, and to Mr. Pavlik and Mr. Witkowski (as well as the rest of the media): There is not now, nor has there been, any economic RECOVERY!!!!!!!!!!!! Has NOT happened. You can put as much gold paint on bulls**t as you want. It's still just bulls**t.

Apr 29, 2014 11:53AM
NO ONE is a "performer" when QE has puffed dead cats for nearly a decade now. You are throwing your money away investing in rigged financial anything. 
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