Half of Dow Companies to Post Profit Gains

BOSTON (TheStreet) -- The 30 companies in the Dow Jones Industrial Average are expected by analysts to post earnings growth of 6.5% in the fourth quarter versus the third, buoyed by improved consumer confidence, manufacturing and business spending.

Companies that beat analysts' projections may get a quick boost in their share prices. In the third quarter, 19 Dow companies exceeded estimates and 10 fell short, some spectacularly so, while one was on target. Alcoa ( AA), the largest U.S. aluminum producer, kicked off earnings season yesterday, reporting profit that topped analysts' estimates.

For all of 2010, the Dow is forecast to show earnings growth of 24%, according to Thomson Reuters, while the broader S&P 500 Index may record growth of 27%, including a 32% jump in the fourth quarter.

Shares that make up the Dow gained 11% last year, while the S&P 500 climbed 15%. Among the losers, Cisco Systems ( CSCO) dropped 15% last year, although analysts are predicting that Cisco will make a comeback.

Sixteen of the 30 companies in the Dow are expected to deliver improved profits compared with the third quarter, while 11 are forecast to be lower, said Globe Newswire, which collects analysts' average estimates. No company is expected to report a fourth-quarter loss.

Indicative of the strength of fourth-quarter earnings, Thomson Reuters said it expects that nine of the 10 sectors in the S&P 500 saw improved earnings in the fourth quarter compared with a year earlier.

Companies expected to record the biggest earnings gains are those in the financial and health-care industries, which were particularly hard hit over the past few years.

Leading the list of Dow members with better earnings are two pharmaceutical firms: Merck ( MRK) and Pfizer ( PFE), both of which have struggled as the government has attempted different versions of health-care reform as patent expirations of key moneymakers took hold.

Merck is expected to post fourth-quarter earnings of 83 cents per share versus 11 cents in the third quarter. The drugmaker was a disappointment in the third quarter, when analysts projected earnings of 82 cents per share. Merck missed by 87%. It remains to be seen if the fourth quarter represented a turnaround.

Merck made the $41 billion acquisition of competitor Schering-Plough in March 2009 in hopes that it will get it back on track. The company took on $85 billion in debt to fund the transaction, but its huge cash flow -- an estimated $12 billion in 2011 -- should help pay that down relatively quickly. In late October, the company said it expected 2010 earnings of $3.35 per share, and analysts are currently estimating EPS will grow by 13% to $3.80 next year.

Pfizer, the world's largest pharmaceutical company -- with a $140 billion market capitalization -- is expected to post earnings of 46 cents per share in the fourth quarter, up from 11 cents in the third. It also had a big earnings miss, as analysts expected 51 cents a share in the third quarter. Pfizer reported 11 cents, missing analysts' estimates by 78%.

In 2010, Merck shares fell 1.4%, while Pfizer's lost 3.7% of their value.

The earnings report of financial-services bellwether Bank of America ( BAC) is much anticipated as it indicates the direction of the banking, and lending, industry. Bank of America is projected to be among the Dow's top gainers, with a big swing in earnings -- an improvement of 133% in the fourth quarter over the third -- to 25 cents a share from a loss of 77 cents per share, meaning it missed its third-quarter projected earnings by a whopping 603% with that loss.

The banking giant has been mired in the financial crisis since 2008, so a strong fourth quarter, despite continued write-downs of bad loans or mergers gone bad, may well be an indicator the worst has passed. Bank of America's 7% share-price increase this year may be in anticipation of that. Its shares were down 11% in 2010.

Financial-sector stocks have been big movers in the fourth quarter. Thomson Reuters said in a Jan. 7 report that the S&P 500 Index's financial firms will post combined earnings of $36 billion versus $2 billion in 2009. Since Oct. 1, that same group has seen earnings growth of almost $4 billion.

Indeed, if the financial sector's performance is removed from the S&P 500, the growth rate for the broader index would slow to 11%, said Thomson Reuters.

Verizon Communications ( VZ) is expected to post a big fourth-quarter earnings gain of 77% to 55 cents a share, up from 31 cents in the prior quarter. Verizon's shares were up 21% in 2010, and the company is up 1.8% this year, coinciding with the announcement that it will begin offering Apple's ( AAPL) iPhone over its network, a relationship that previously belonged only to AT&T ( T).

Thomson Reuters said S&P 500 telecommunications stocks are forecast to post a 13% increase in earnings in the fourth quarter. Verizon Wireless is the clear leader in the industry, with 93 million customers and coverage of more than 95% of the U.S. population, while its fixed-line business reaches 15 million.

The expected big loser among Dow stocks in the quarter is Verizon competitor AT&T. Its earnings are expected to tumble 74% to 54 cents per share from $2.09 in the third quarter. AT&T had been expected to earn 58 cents in the third quarter, and it beat analysts' estimates by 264%.

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