Four Things to Watch for in 4Q Earnings

MILLBURN, N.J (TheStreet) -- The holidays have come and gone, and earnings season is once again upon us. Here are four things that The Finance Professor will be focusing on as companies report their fourth-quarter earnings over the course of the next few weeks.

1. Revenue Growth

2009 was marked by net income stabilization and moderate growth, a feat achieved primarily through cost reduction. Top-line revenue growth, however, was stunted due to poor comparisons with the prior year and a strengthening U.S. dollar. If we are truly going to experience an economic rebound, earnings growth is going to have to be sourced from top-line revenue growth.

Indications are that holiday season sales were better than expected. This was due to both improving consumer demand and smaller markdowns taken by retailers. The real test for revenue growth will come from the domestic retailers, especially the big box stores such as Macy's ( M) and J.C. Penney ( JCP), and from multinationals such as International Business Machines ( IBM) and Merck ( MRK). Also, look for gross credit and debit charges from the big credit card processors, such as Visa ( V) and MasterCard ( MA).

2. Corporate Actions

Corporations have been stockpiling cash throughout 2009. The increase in cash balances is being generated from multiple sources of cash flow:
  • Normal operations aided by lower payrolls and reduced selling, general and administrative expenses
  • Additional debt issuance as interest remains low and appetite for corporate debt remains high
  • Cutbacks on stock repurchases
  • I would expect corporations to announce corporate actions in the first quarter of 2010. This would take the form of increased dividends, stock repurchase authorizations or, more important, acquisitions. I believe that the best way to play M&A is not to try to guess which companies will be acquired but rather to predict which will benefit from the M&A process. The best pure play in M&A could be Greenhill ( GHL). The next best alternative would be Goldman Sachs ( GS).

    3. Improvement in Auto Sales

    Cash for Clunkers not only boosted auto sales in the summer but also depleted inventories. December auto sales showed some improvement, especially for Ford Motor ( F), which appears to be the strength of the U.S. automobile industry. It is likely that the need to replenish inventories at the auto manufacturing plants also had the secondary effect of boosting auto supply and component earnings.

    If my assumptions are correct, then we should see improved results and guidance from the entire auto supply and component chain. Companies that would benefit from this theme include Johnson Controls ( JCI), Magna International ( MGA), Exide Technologies ( XIDE) and Tenneco ( TEN).

    4. Financials

    There has been dramatic improvement in the financial industry, especially the banks. As a group, the banks have raised capital, lowered costs, sold off some businesses, laid off employees and been forcibly restrained from paying excessive bonuses. In the prior quarter, we began to see that capital ratios -- primarily tier I capital -- were back up to healthy levels. Tier 1 capital, defined by international agreement under the Basel accords, is considered the primary measure of a bank's financial strength from regulatory and investor perspectives.

    The last laggard indicator for the financials is on the consumer credit side. Specifically, we need to focus on nonperforming loans, credit card and loan delinquencies, and mortgage defaults. In the third quarter, the industry in the aggregate reported that these metrics were no longer deteriorating on a significant basis. Some firms, such as American Express ( AXP), reported stabilization and minor improvement in these metrics. Should we see the entire industry report stabilization and improvement, then the true bottom in this industry will be in place.

    -- Written by Scott Rothbort in Millburn, N.J.

    At the time of publication, Rothbort was long Goldman Sachs stock and long Ford stock, calls and convertible securities, although positions can change at any time.

    Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site; and, publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

    Mr. Rothbort is a regular contributor to TheStreet.com's RealMoney Silver website and has frequently appeared as a professional guest on Bloomberg Radio, Bloomberg Television, Fox Business Network, CNBC Television, TheStreet.com TV and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

    Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

    Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.

    More from Investing

    Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

    Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

    Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

    Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

    Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

    Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

    Adobe Isn't Just Going After Shopify With Its Latest Acquisition

    Adobe Isn't Just Going After Shopify With Its Latest Acquisition

    Experts Break Down GDPR Risks for Investors

    Experts Break Down GDPR Risks for Investors