This week's 2 most important earnings reports

A pair of companies will give investors a glimpse into the health of the economy as the holidays approach.

By TheStreet Staff Oct 24, 2011 11:31AM

By Robert Holmes, TheStreetTheStreet


Investors are stuck in a no man's land in which Credit Crisis 2.0 is capsizing a shaky global economy.


Every region of the world and asset class has its share of woes, from emerging markets to bonds, a condition that's unnerving American investors already wracked with worry over high unemployment.


For some enlightenment, watch the earnings reports this week from (AMZN) and UPS (UPS). No other companies will offer as much information about the health of the consumer-oriented U.S. economy.


To be sure, other companies will give investors important industry snapshots. Ford (F) will update investors on the state of the U.S. car market, which is stronger than it's been in years. Coach (COH) will offer a view of the luxury sector, which has been as hot as the discounters. And Caterpillar (CAT), with its international industrial operations, demonstrated Monday morning that the global economy is unlikely to fall into another wave of recession.


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Amazon, which publishes its quarterly report after the stock market closes Tuesday, has its hand in so many areas that it's become a weather vane for several industries. Once considered an Internet bookstore, Amazon now sells shoes, DVDs, video games, toys, exercise equipment -- the list goes on. Amazon has also become a powerhouse against Apple (AAPL) and Netflix (NFLX) with its catalog of streaming digital music and movies.


Apart from its dominant status as the biggest Internet retailer, Amazon has shifted its attention to cloud services, one of the hottest trends in technology. And now the company is set to go head-to-head against Apple's iPad with its Kindle Fire tablet device.


Many iPad competitors have come and gone, failing to loosen Apple's stranglehold on the market for tablet PCs. Amazon, though, is in a unique position with its Kindle Fire tablet, as the device is priced well below the iPad 2 base model ($199 versus $499). In addition, Amazon has the ecosystem of music, movie and application downloads that other Apple rivals lack. What Amazon says about the presale success of the Kindle Fire -- as well as how its retail operations are running -- will be more important than even an Apple rollout.


"We'll get an idea of the consumer health in general," says Bryan Keane, co-portfolio manager of the Alpine Global Consumer Growth Fund (AWCGX). "It is an important earnings report because of the size of Amazon. Because they do sell so many different types of products, you can get an idea of how the different segments are doing."


Keane says Amazon has become more influential in the stock market because of its diversification. "They're expanding into much broader things and they're continuing to evolve," he says. "Look at Yahoo (YHOO) and eBay (EBAY), which haven't evolved. Amazon has evolved beyond its core market.


While Amazon's outlook will be key, Keane says investors will have the most interest in what the company says about the early returns for the Kindle Fire.


"When you talk about the tablet business, more than taking on the iPad directly, it's more about taking advantage of the growing market," Keane says. Amazon is "filling a void that thus far the other iPad competitors have not been able to do, and that's the lower price point."


Still, Amazon may report narrower margins and falling profits as a result of higher spending, Keane says. However, Amazon has historically been great at making the right investments because they lead to an increase in sales, he says.


Despite the importance of the earnings report, Keane has one argument on why Amazon shouldn't be a core holding for every investor. "It's not perfect for every portfolio because it is growth, not value. It's not a stock trading at 10 times earnings," Keane says. Amazon has a forward price-to-earnings ratio of 73, many times the market multiple of around 13 times earnings.


When UPS releases its report, also on Tuesday, investors will be almost solely focused on the shipper's expectations for the holiday quarter. The 104-year-old company, which sends packages to more than 200 countries and territories, is considered one of the top economic barometers for investors. It holds that the more packages UPS handles, the better the economy is performing. On Monday morning, UPS competitor FedEx (FDX) said it plans to hire 20,000 seasonal workers, 18% more than last year, to handle increased holiday season deliveries.


"It's all about the outlook," says Kevin Sterling, a transportation analyst at BB&T Capital Markets. "There is no other company that has a better look at the holiday shipping season. They're not ready to give 2012 guidance yet because they don't have that much visibility, but they should update us on the fourth quarter."


Sterling notes that inventories at retailers are lean. If there is any hint of stronger consumer demand, the expectation is that retailers will scramble to replenish inventories at stores before the holidays. These are the types of trends UPS can offer the world.


"They're in constant contact with their customers so they can manage capacity, especially in the holiday season," Sterling says. "They're going to give us a good look into what retailers are thinking for this holiday season. That will drive their forecasts."


In July, UPS affirmed its earnings guidance, although Sterling notes how muted the outlook was. "You could tell they were uncertain about the economy back in July," he says.


After several tough months for all companies in July and August, freight indicators have picked up in September and October, which bodes well for UPS and, in turn, many other companies.

"When UPS talks, we want to hear they're feeling better about things. We want to watch for the tone UPS strikes," Sterling says.

Tags: AMZNups


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