Earnings and the Dow: What to Look For


In the first half of this week, five stocks in the Dow Jones Industrials (INDEX: ^DJI) will report their earnings results for the third quarter. With many analysts calling for weak earnings overall for the stock market in general, investors are nervous about the health of the economic expansion.

If you look at companies from a long-term perspective, though, a knee-jerk drop in a stock's share price following bad quarterly earnings could be the investing opportunity of a lifetime if you think the company will recover in the future. So as these stocks report, keep an eye on what they say not just about the past quarter but also about their prospects for the next year and beyond. Let's look at exactly what analysts think about the five companies reporting their earnings early this week.

Looking at the extremes
Perhaps the biggest potential for a serious pullback may come from Bank of America (NYS: BAC) . If you look only at the current quarter, you'll see that expectations are very low, with the consensus calling for the bank to reverse a year-ago gain and post a loss of $0.07 per share. That's particularly disconcerting when you consider the strength in mortgage origination that two of B of A's peers reported on Friday, and with the stock having fallen more than 2% after those reports, the mood appears dire. Yet looking forward, analysts expect 2013 earnings to jump well over 150% from their 2012 levels, putting the bank in a position where its earnings multiple would finally look downright cheap.

On the other side of the coin, Intel (NAS: INTC) can't claim the same level of confidence. Having already reduced its outlook in advance of its coming earnings announcement on Tuesday, Intel has everyone concerned about its attempted transition away from a PC-centered business model to diversify toward mobile devices. So far, that move has been slow in coming, and analysts don't expect to see bottom-line success come anytime soon. For 2013, estimates call for a rise in earnings per share of just 1.5%, not even getting back to 2011 levels. You'll need to look at Intel's report closely to find clues about the semiconductor stock's 2013 prospects and any news that could change its outlook.

Solid growth
In between those two extremes, you'll find solid middle ground among companies that look poised to recover, if not this quarter, then within the next year. For Johnson & Johnson (NYS: JNJ) , a long line of recalls and other business challenges have kept a lid on shares over the past year, helping to explain an expected drop in earnings per share for the third quarter. Next year, though, earnings could jump around 8%, setting the stage for a comeback in the stock if the company can deliver what analysts want to see.

Coca-Cola (NYS: KO) is in a similar situation. Analysts expect a slight decline in earnings this quarter, as adverse currency effects and higher ingredient costs. But extend your view out by a year, and you'll see that the company is seen growing earnings by nearly 10% in 2013. With shares at a fairly pricey multiple, the stock will need that growth to justify its current valuation.

Finally, IBM (NYS: IBM) has been on an earnings mission in recent years, and with the goal of hitting the $20 mark in annual earnings per share by 2015, it's hoping to stay on track this time around. With anticipated 10% EPS growth in the third quarter, IBM is on track. But the key number to watch is the expected growth of 10% for the entire year in 2013. If the company can continue executing on its overall strategy to emphasize higher-margin businesses and give up commoditized segments like basic hardware, IBM is well positioned to keep rising.

Keep your eyes open
Earnings reports tend to drill down on results from three months that are irrevocably in the past. If you can turn forward and look to whatever those reports can tell you about a company's future, you'll end up well ahead of the crowd.

Bank of America could be a big turnaround story, or it could fall flat. Find out arguments for and against the stock in the Fool's premium report on the bank, where you'll find the information you need to determine whether Bank of America is a buy right now. The report details the bank's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

The article Earnings and the Dow: What to Look For originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter, @DanCaplinger. The Motley Fool owns shares of Bank of America, IBM, Intel, and Johnson & Johnson. Motley Fool newsletter services recommend Intel, Johnson & Johnson, and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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