The Two Most Important Company Earnings This Week

BOSTON (TheStreet) -- Global bank JPMorgan Chase (JPM) and oil company Chevron (CVX) kick off fourth-quarter earnings reporting season this week, giving the first important clues on corporate performance as global growth slows.

Alcoa ( AA) posts results after the closing bell today, marking the unofficial, yet traditional, start to earnings season. The aluminum maker has cut capacity by 12% due to a drop in prices, leading investors to think Alcoa will report a loss.

Investors will have to hunt elsewhere for clues on how businesses fared during the fourth quarter if the short-lived 2012 rally is to continue. After only a week, the S&P 500 is up 1.6% and the Dow Jones Industrial Average has climbed 1.2%. One of the brightest spots in the early year rally has been bank stocks, with the financial sector of the S&P 500 up more than 3%.

Only four other companies in the S&P 500 and one other Dow component are scheduled to release results during the week, according to FactSet Research. The peak weeks of the fourth-quarter earnings reporting season won't come until Jan. 17. As it turns out, one of the S&P 500 and Dow components out with earnings results in the coming week is a financial stock, and it could shed light on how banks performed over the past three months.

JPMorgan is the first of the major financial companies to report financial results each quarter, making it a key report for investors to watch for early trends. Analysts are forecasting a fourth-quarter profit of 93 cents on revenue of nearly $23.5 billion, according to a poll by Thomson Reuters. The bank will open the books on its fourth quarter on Friday.

The financial sector was the worst-performing sector of the S&P 500 last year -- down around 20% -- but financials have been leading the way in 2012. With one week in, financials are up 3.5%, the biggest sector gain aside from materials, which are up nearly 4%. If investors have any hope that the rebound continues, JPMorgan will have to deliver.

While it's difficult to say that a strong or weak performance for JPMorgan will mirror that of Citigroup ( C) or Bank of America ( BAC), it's important to watch for general banking trends. Investors will recall that they first saw JPMorgan use loan loss reserve reversals to increase profit, a trend that continued across nearly all banks. That was followed up last quarter with a profit boost from JPMorgan's debit valuation adjustments, an accounting move that other banks also employed.

"Earnings are the ultimate report card. You use it to really identify what's happening in a business," says Oliver Pursche, manager of the GMG Defensive Beta Fund ( MPDAX), who owns shares of JPMorgan. "It's the bellwether within the financial-services area, so we want to see how regulatory pressures, margin compressions, and the real impact of that rather than the speculation."

Pursche says there's no single component to JPMorgan's report he'll be looking at. He says investors should look beyond the headline numbers and focus on important components, like cash flow, trading revenue, and the various level of risks the bank took to achieve earnings.

"Where did the money come from? How much was from lending and consumer operations? What's the exposure to mortgages?" Pursche says. "That's what's important to look at, not just revenue against expectations or earnings that missed or beat."

Meanwhile, a key read on the energy sector will come courtesy of Chevron, which is the first major oil and gas company to offer their view on fourth-quarter performance. Chevron will give its fourth-quarter interim update after the stock market closes Wednesday, with the full earnings release to come Jan. 27.

"You need to look at Chevron," Pursche says. "It's probably going to be more meaningful than JPMorgan because of the business that they're in and the global footprint and the impact of global demand their business has. JPMorgan is not as demand driven as a Chevron or an Exxon. That's going to be much more telling."

Chevron should report a quarterly profit of $3.29 a share on revenue of almost $73 billion, according to a poll of analysts by Thomson Reuters. Chevron has topped analysts' profit targets for the previous four quarters in a row.

"For four straight quarters, Chevron has earnings surprises to the upside, and I think we'll see that again this quarter as the global economy continues to rely on oil," says Dan Neiman, manager of the Neiman Large Cap Value Fund ( NEIMX). "But in the environment we're in, you're going to see commentary that is more conservative."

Neiman, whose fund owns shares of Chevron, says he's still looking for earnings growth of 40% year-over-year, which is huge for a blue-chip company.

"That shows me that if we do get a surprise, we're talking about great growth still trading at eight times earnings," Neiman says. "But as an investor, you're looking at Chevron as a conservative company. They won't put out huge expectations only to be hurt by it."

That said, Neiman says that with Chevron's massive market cap of $215 billion and big global presence, it's all about the strong fundamentals. "It's a good indication if they come out in strong earnings, they're succeeding in the same market environment others are struggling in," he adds.

Mike Breard, and energy sector analyst for Hodges Capital Management, says he will be very interested in what Chevron says about its outlook, too, especially with oil trading above $100 a barrel.

"Oil production has been flat lately, but they're spending a lot of money for very big products coming online," Breard notes. "Longer-term, it's getting to be more expensive to find oil, whether it's in 2,000 feet of water or shale. Oil prices need to stay high or you won't get production increases."

Breard also notes how Chevron could give investors a good view of how demand has been in trouble areas like Europe as well as hot growth areas like China.

"If things slow down in Europe for Chevron, it would certainly have an impact elsewhere," he says. "So you can't just look at one market, you have to look at the consequences in Europe leading to problems in China and India."

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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