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Wall Street seeks growth after energy

Analysts say the long oil and gas profit boom is over. Hopes are high for tech and healthcare.

January 17, 2007|Tom Petruno | Times Staff Writer

The wave of earnings reports due in the next few weeks is expected to herald a seismic shift in corporate fortunes.

With oil prices plunging, Wall Street is betting that the long profit boom in the energy sector is over. Now, investors are looking to industries such as technology and healthcare to emerge as earnings growth leaders.

The stakes are high, because without exciting profit growth somewhere, investors could decide that the stock market's bull run is on its last legs.

The Dow Jones industrials edged up to another record high Tuesday amid a smattering of earnings announcements. The bulk of the reports will flow out in the next three weeks.

With the surge in crude oil prices since 2003, energy has been a driving force behind the record streak of profit expansion for the blue-chip Standard & Poor's 500 stock index.

Through the third quarter, total operating earnings of S&P 500 companies rose at a double-digit percentage rate for 18 consecutive quarters, S&P data show.

But the steep slide in oil since July is expected to pull down the energy sector's results in the fourth quarter. As a group, energy companies in the S&P 500 are expected to post a 5% decline in earnings compared with a year earlier, S&P estimates.

That would be the first year-over-year drop in energy earnings since the third quarter of 2002, said Howard Silverblatt, who tracks earnings at S&P.

Chevron Corp. last week warned that its fourth-quarter results would be "adversely affected" by lower crude prices and other issues.

What's bad for energy companies is good for oil consumers, of course. Retail sales in December beat expectations, and that could boost fourth-quarter earnings at retailers and other consumer-dependent firms.

"Retailers had a good year overall," thanks in part to the pullback in energy prices, said Ashwani Kaul, senior analyst at earnings tracker Reuters Estimates in New York.

Lower energy prices also could bolster earnings of chemical companies that use oil as a feedstock. Within the S&P 500 index, the basic materials sector -- which includes chemical companies -- is expected to report a 36% year-over-year gain in fourth-quarter operating earnings, according to S&P data.

For the S&P 500 as a whole, strong fourth-quarter earnings growth in the basic materials, telecommunications and financial services sectors is expected to help offset declines in energy, utilities and home building.

Operating earnings of the S&P index are expected to be up 8.2% in the fourth quarter from a year earlier, based on estimates from S&P analysts. Operating results exclude the effects of one-time gains or losses.

That would be a steep fall-off from the third quarter, when S&P 500 companies' operating earnings soared 22.3% from a year earlier.

An 8.2% increase also would mark the first quarter since 2002 in which earnings failed to rise at a double-digit percentage rate, Silverblatt said.

But a slowdown has long been expected on Wall Street, many analysts say. And rather than look behind, investors typically look ahead and seek out stocks of companies whose earnings outlooks are improving.

In 2007, profit is expected to grow fastest in the telecom, tech and healthcare sectors.

Telecom-sector earnings in the S&P 500 are estimated to be up 27.8% this year from 2006, according to S&P analysts. The tech sector is expected to post growth of 21.6%, and healthcare companies' earnings are expected to be up 15.3%.

By contrast, S&P 500 index earnings as a whole are expected to rise 9.9%, S&P estimates.

Optimism about telecom and tech earnings is rooted in hopes for a sustained pickup in spending on new computers and related equipment, Kaul said. "People have not been spending on upgrades" in recent years, he said. But that should change in 2007, thanks in part to Microsoft Corp.'s rollout of its new Vista operating system, he said.

Results at healthcare companies, including some drug makers, are expected to improve on the subpar growth of recent years.

But for tech, the new year isn't off to a great start. Cellphone giant Motorola Inc. already has given a downbeat preview of its fourth-quarter results. So has chip maker Advanced Micro Devices Inc.

On Tuesday, chip leader Intel Corp. reported quarterly earnings that beat expectations, but the company's profit-margin outlook disappointed analysts.

Although it's early in the reporting season, the tech stumbles so far may remind investors that hopes also were high a year ago for an earnings turnaround in the sector -- and that the industry failed to deliver.

Profits grew a mere 1.9% for the S&P 500 tech companies last year, S&P analysts estimate.

The silver lining: Because 2006 results were so poor, many tech companies may have an easier time posting growth this year.



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2007 leaders?

The telecom and tech sectors are expected to post the fastest earnings growth in 2007.

2007 estimated operating profit growth by Standard & Poor's 500 index sector

Telecom - +27.8%

Technology - +21.6%

Healthcare - +15.3%

*Utilities - +11.2%

Industrials- +11.2%

Basic materials - +8.3%

Consumer staples - +8.2%

Financial services - +6.4%

Consumer discretionary - +4.9%

Energy - +4.5%

*Includes automakers, home builders and many retailers


Source: Standard & Poor's

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