Cyprus is 'Too Small to Matter' - Ahead of Wall Street
22 Marzo 2013 - 10:40AM
Zacks
Friday, March 22, 2013
The moral of the Cyprus story is that
it pays to be ‘too-big-to-fail’; the Europeans are essentially
telling the Cypriots that they don’t mind letting their banking
system go under. It’s up to Cyprus now. If they can raise the
money, they will get bailed out, otherwise not. As far as financial
markets are concerned, the Cyprus story is nothing more than
background noise – they are ‘too-small-to-matter’.
Far more important to the market than Cyprus is to figure out what
the weak results from the likes of Oracle
(ORCL) and
FedEx (FDX)
tell us about global capital spending and economic growth. FedEx
has been struggling for a while now, so their negative surprise may
not be so ‘surprising’ even though it was. But is the Oracle ‘miss’
a sign of things to come in the all-important Tech space?
Expectations for first quarter earnings from the Tech sector are
already quite low, but should we brace ourselves for even more
weakness? The sector wasn't exactl in prime health in the fourth
quarter either.
Total Tech sector earnings are expected to drop -5.1% in the first
quarter after the +1.6% gain in the fourth quarter. The weakness is
broad based and not just because of tough comparisons for
Apple (AAPL),
whose earnings are expected to be down almost -15% this quarter.
Other major sector players like Intel
(INTC) and Seagate
Technology (STX) also
have tough comparisons. But the sector’s earnings would be down
from the same period last year even if we exclude these
companies.
Tech side, the overall growth numbers for the first quarter as
whole look very underwhelming. Total earnings for companies in the
S&P 500 are expected to drop -2.8% from the same period last
year, which reflects -1% decline in total revenues and a modest
contraction in margins. This compares to +2% growth in the
preceding quarter. A combination of weak company guidance and tough
comparisons account for the weak growth expectations - the first
quarter of 2012 still remains the high point in quarterly earnings
totals since the start of the current earnings cycle in 2009.
Investors don’t seem to be overly concerned about lack of earnings
growth in the first quarter. The reason for that is that they are
banking on strong growth in the following quarters. The
consensus view is that earnings growth in the first half of 2013
will be roughly equivalent to the growth pace in the second half of
2012 – of about +1%. But they are looking for double-digit earnings
growth in the back half of 2013 and full-year 2014. And as long as
that outlook remains intact, they will learn to live with a weak
growth pace in the first quarter.
But it will likely get harder to
stick to that outlook if companies can’t provide reassuring
guidance for the rest of this year. And it is in this context that
results from the likes of Oracle and FedEx matter.
Hard to tell which way the Cyprus story will unfold in the coming
days, but it may not matter in the end any way.
Sheraz Mian
Director of Research
APPLE INC (AAPL): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
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