Intel, Alcoa to Lead Biggest Profit Gain Since 1993 on Cuts

Jan. 8 (Bloomberg) -- Bank of America Corp.,Alcoa Inc., and Intel Corp. will lead companies worldwide to the biggest earning gains since 1993 as industries hardest hit by the recession benefit from job cuts and cheaper loans.

Profits of S&P 500 Index companies rose 60 percent in the three months ended Dec. 31, the first quarterly gain after nine quarters of declines, according to analysts’ estimates compiled by Standard & Poor’s and Bloomberg. In 2010, financial, semiconductor, auto, energy and consumer goods companies will probably be the best performers, paving the way for a 25 percent rise in full-year earnings.

Globally, companies eliminated more than 2 million jobs in 2009 as real-estate losses forced banks to rein in lending, hurting industries from cars to consumer electronics. The cutbacks should help earnings at S&P 500 Index companies rise by 28 percent in the current quarter. Still, a global recovery in 2010 could be in danger as central banks and governments start unwinding crisis measures implemented last year.

“Companies adapted very quickly to lower demand, and they are leaner and meaner than before,” said Henk Potts, a fund manager at Barclays Wealth in London, which oversees about 134 billion pounds ($213 billion). “The low interest-rate environment should also create an easier environment for companies and make equities look very attractive compared to other asset classes.”

Easy Comparisons

Alcoa, based in New York, is the first member of the Dow Jones Industrial Average to report fourth-quarter earnings on Jan. 11. The largest U.S. aluminum producer may report earnings per share, excluding some items, of 6 cents, compared with a loss of 28 cents.

Fourth-quarter gains of many companies will be marked by easy comparisons to a year earlier, when credit markets seized and banks stopped lending. U.S. gross domestic product shrank 5.4 percent in the fourth quarter of 2008 and consumer spending stalled.

Bank of America, the largest U.S. bank by assets, may rebound in 2010 as losses from its home loan and credit card businesses peak, said Jaime Peters, an analyst in Chicago at Morningstar Inc.

“Now that they’ve repaid the U.S. government, Bank of America is much better positioned to maneuver the way they want,” Peters said. “Bank of America has been the worst performer of the big banks in credit cards, so they have the most to gain when the tide turns.”

Growing U.S. Economy

The Charlotte, North Carolina-based bank is predicted to report on Jan. 20 a fourth-quarter loss of 53 cents a share and a full-year loss of 16 cents a share, the first annual loss in more than 25 years, according to a Bloomberg analyst survey. Buoyed by a growing U.S. economy and fewer defaults by consumers, the bank’s profit is predicted to rebound to 78 cents a share in 2010.

Deutsche Bank AG, based in Frankfurt and Germany’s biggest bank, and Zurich-based Credit Suisse Group AG, Switzerland’s largest bank by market value, may report lower earnings in 2010 than for the previous year, when they benefited from higher margins in investment banking while some competitors recovered from subprime losses.

“Overall the financial sector might not be doing hugely different to the market, but within the sector we will see huge spreads and differentiation,” said Raimund Saxinger, a fund manager at Frankfurt-Trust Investment GmbH, which manages about 18 billion euros ($26 billion). “Because of the after-effect of the crisis, it will become clearer and clearer that some have survived the crisis in better shape than others.”

Higher Funding Costs

European banks may also be facing higher funding costs as central banks withdraw 875 billion euros in liquidity support, according to Barclays Capital. Consumer banks may have better prospects than companies that rely more on securities businesses as the economy improves, they said.

Costs cuts and an improving economy will help carmakers to increase profits this year, analysts say.

Daimler AG, the maker of Mercedes-Benz cars and trucks, may record a 3.67 billion-euro swing in fortunes in 2010, according to a Bloomberg survey. Daimler is likely to post net income of 1.76 billion euros this year after a projected loss of 1.91 billion euros in 2009, according to the median of 17 estimates.

The Stuttgart, Germany-based company, the world’s largest truck manufacturer and the No. 2 luxury-car maker, targets as much as 5 billion euros in spending cuts for 2009 by reducing pay and work hours.

Still, European car sales may fall 8 percent to 15 million vehicles in 2010 after the end of government incentives to reverse car-market declines, according to researcher IHS Global Insight.

Price Cuts

Volkswagen AG, PSA Peugeot Citroen and Bayerische Motoren Werke AG will struggle to increase revenue this year if they cut prices to keep their share of a shrinking market, said Mike Tyndall, an automotive analyst at Nomura Securities in London.

“In the fourth quarter of 2009, you’ll see a much healthier level of profitability compared with last year, when factories were closed for at least a month,” said Tyndall. “The question is how sustainable are these margins.”

U.S. carmakers and their suppliers will see earnings more than quintupling in 2010 after enduring the worst year for U.S. auto sales since 1982, according to Bloomberg data.

Earnings will also get a boost from deep cost cutting at automakers and suppliers following the bankruptcies at Detroit- based General Motors Co. and Auburn Hills, Michigan-based Chrysler Group LLC in 2009. U.S. auto sales will rise 20 percent this year, according to the Center for Automotive Research.

‘Greater Discipline’

Rising car sales will help steelmakers’ earnings in 2010. Luxembourg-based ArcelorMittal, the world’s biggest steelmaker, may post a $3.9 billion net income in 2010, according to the median of 15 analyst estimates compiled by Bloomberg. That compares with a predicted loss of $394.5 million for last year.

“The major steel producers are demonstrating much greater production discipline during this downturn than in previous ones,” said Gavin Wood, an analyst at Nomura Holdings Inc. in London, who has a “buy” recommendation on ArcelorMittal.

ArcelorMittal on Feb. 10 may post a fourth-quarter net income of $546 million, according to the median of four analyst estimates. The company posted a $2.6 billion loss a year earlier, after taking one-off charges of $4.4 billion that included writedowns on inventories and raw-material contracts as steel prices plunged.

Struggling Airlines

In contrast to carmakers, airlines will probably struggle to bolster earnings as a slump in demand for business travel persists.

British Airways Plc, which last month blocked a 12-day strike by its cabin crew over the Christmas holiday period, may report a second straight annual loss for the year ending March 31. Air France-KLM Group, Europe’s biggest airline, is also projected to have its second consecutive annual loss.

Boeing Co., the world’s largest aerospace company, in 2009 may have its largest profit decline since 2002 after charges for delays to its two new-plane programs, the composite-plastic 787 Dreamliner and the 747-8 expanded jumbo jet. Analysts project that earnings at the Chicago-based company probably improved in the fourth quarter from a year earlier, when the company was shut down by a two-month strike.

‘Modest Recovery’

“I don’t get the feeling, looking at the year ahead, that things are going to be much better for airlines,” said Gert Zonneveld, an analyst at Panmure Gordon. “The economic recovery is still fairly modest.”

Analysts also predict industrial companies to have lower earnings growth in 2010 compared with other businesses as clients in the automotive and factory machine industries hold back investments in new equipment.

Siemens AG, Europe’s largest engineering company, on Jan. 26 may report lower earnings and sales for the fiscal first quarter that ended Dec. 31 as orders fell. The Munich-based company has said sales in all its three divisions, industry, energy, and healthcare, will fall in the current fiscal year.

General Electric Co., the world’s biggest maker of jet engines, power-plant turbines and medical-imaging equipment, on Jan. 22 may post a decline of almost 50 percent in fourth- quarter profit. Profit excluding some items at the Fairfield, Connecticut-based company may decline to 26 cents a share, according to the average estimate of 13 analysts surveyed by Bloomberg.

Oil producers are poised to benefit from crude prices that were on average 29 percent higher in the final three months of 2009 than the previous year. Crude-oil futures rose the most in a decade, finishing 2009 at $79.36 a barrel, more than double the year’s low of $32.70, set in January.

Oil Demand

Analysts predict that profits at Exxon Mobil Corp.,Chevron Corp. and ConocoPhillips, the three largest U.S. energy companies, will also rise in 2010 as a recovering economy further drives up demand for oil and the fuels made from it.

“The price of oil is a key component,” said Barry James, who manages $2 billion in assets at James Investment Research in Xenia, Ohio. “You’ve seen Exxon and some of the others move out of refining and marketing so that they can focus more clearly on getting it out of the ground and making a profit in that arena.”

Fourth-quarter results at BP Plc may outshine larger rival Royal Dutch Shell Plc after the London-based producer ramped up output in the Gulf of Mexico and restored operations at U.S. refineries. PetroChina Co., the world’s biggest company by market value, is projected to post a 46 percent increase in fourth-quarter profit.

China’s growth may accelerate to 9.4 percent this year from an estimated 8.5 percent in 2009 as the government sustains stimulus measures and the world recovers from the financial crisis, economists forecast.

Electronic Gadgets

Improving consumer confidence and demand for flat-screen television sets, gaming consoles and so-called smartphones, which allow users to surf the Web, will also boost earnings of consumer electronics companies this year.

Sony Corp., based in Tokyo, is projected to recover next fiscal year from its first back-to-back annual losses since its 1958 listing after Chief Executive Officer Howard Stringer eliminated about 20,000 jobs, cut 300 billion yen ($3.3 billion) in costs and 500 billion yen of inventory.

The maker of Bravia televisions may post net income of 92 billion yen in the 12 months to March 2011 after a projected 66 billion-yen loss in the year-earlier period. “Demand for consumer electronics has started to come back and year-end business was robust,” said Kota Ezawa, a Citigroup analyst in Tokyo.

Rising PC Demand

Global TV shipments will likely increase 6 percent this year, compared with 0.4 percent growth in 2009, according to December estimates at Daiwa Securities Capital Markets Co. Worldwide shipments of personal computers will rise 13 percent and those of mobile phones will gain 9 percent, according to Daiwa.

Samsung Electronics Co., based in Suwon, South Korea, and Asia’s largest maker of chips, flat-screens and mobile-phones, is projected to post record net income of 12.4 trillion won ($10.8 billion) in 2010, up 28 percent.

Intel, the world’s largest chipmaker, has forecast sales of $9.7 billion to $10.5 billion for the fourth quarter of 2009. Even the low end of that range would represent the first revenue growth in a year for the Santa Clara, California-based company. Analysts estimate sales growth of 23 percent to $10.1 billion, up from a drop of 23 percent a year earlier.

Memory-chip prices are expected to remain stable in the first half of this year after more than tripling in 2009 as demand for personal computers recovers, according to James Song, an analyst at Daewoo Securities Co. in Seoul.

Holiday Sales

Apple Inc., based in Cupertino, California, will likely surpass earnings estimates for the three months ended in December, lifted by holiday sales of new models, said Shaw Wu, an analyst with Kaufman Bros. in San Francisco. Analysts surveyed by Bloomberg anticipate sales of $11.9 billion and profit of $2.05 a share.

Espoo, Finland-based Nokia Oyj, the world’s largest maker of mobile phones, may say fourth-quarter net income gained 1 percent to 582.1 million euros, snapping six quarters of declines, according to the estimates of 18 analysts. Jason Willey, an equity analyst with Standard & Poor’s, predicts global handset sales to rise by 11 percent in 2010.

“Businesses will continue to spend on chips and software,” said John Lynch, chief market analyst for Evergreen Investments, which manages $155.5 billion. At the same time, “businesses are going to be hesitant to commit to employee growth, to payroll growth, just yet, until they see how the economy performs with less government intervention,” he said.

Toys, Clothes

Retailers and makers of clothes and toys will also have benefited from higher Christmas sales, analysts say.

Wal-Mart Stores Inc., the world’s largest retailer, is projected to increase adjusted fourth-quarter profit by 8.7 percent to $1.12 a share. A year earlier, adjusted profit of $1.03 excluded a litigation charge of 7 cents.

Macy’s Inc., the second-largest U.S. department store company, may post a 7 percent increase in adjusted per-share profit for the three months through January, after a 36 percent slump a year ago. The improvement comes after the Cincinnati- based retailer cut inventories, reducing the need for profit- eroding discounts.

Margin Push

“The combination of better-than-expected sales and aligned inventories should drive healthy margins in the fourth quarter,” Bill Dreher, an analyst with Deutsche Bank in New York, wrote in a Dec. 29 report about U.S. department store chains.

European drugmakers are likely to lead global pharmaceutical earnings as government orders for swine-flu vaccines shored up fourth-quarter sales at GlaxoSmithKline Plc, Novartis AG and Sanofi-Aventis SA.

Based on a Bloomberg survey of six analysts, London-based Glaxo is likely to say on Feb. 4 that earnings per share excluding some items increased 25 percent to 33.4 pence. Basel, Switzerland-based Novartis and Paris-based Sanofi are also likely to report a boost in earnings.

Earnings in the health-care industry are likely to be sustained throughout 2010, helped by higher-margin sales of vaccines, growth in emerging markets and a slew of new products hitting the market, Matrix Corporate Capital analyst Navid Malik said in an interview.

Analysts predict rising earnings for almost all industry groups in the S&P 500 Index this year with overall profits increasing by 25 percent. That compares with an expected decline of 12 percent in 2009.

“We’ve gone through the heart of the recession and now it’s more business as normal, but with lower growth,” said Barclays Wealth’s Potts. “The government has mortgaged the future to pay for the present, so some of the stimulus is going to fade away.”

-- With assistance from Adam Satariano in San Francisco, Francesca Cinelli in Milan, David Mildenberg in Charlotte, Keith Naughton in Southfield, Cotten Timberlake in Washington DC, Ian King and Connie Guglielmo in San Francisco, Chris Burritt in Greensboro, Edmond Lococo in Boston, Jim Polson, Lynn Thomasson, Jack Kaskey and James Langford in New York, Rob Delaney in Toronto, Sarah Shannon, Trista Kelley, Adam Haigh, Eduard Gismatullin, Steve Rothwell, Simon Casey and Thomas Biesheuvel in London, Chris Reiter in Berlin, Elena Logutenkova and Antonio Ligi in Zurich, Wing-Gar Cheng, John Duce in Hong Kong, Kiyori Ueno, Mariko Yasu and Bret Okeson in Tokyo, Seonjin Cha and Kevin Cho in Seoul, Archana Chaudhary in Mumbai, Susanna Ray and Dina Bass in Seattle and Edmond Lococo in Boston. Editors: Simon Thiel, Andrew Noel