Commodity, Energy Prices To Impact Corporate Earnings

Bank of the Ozarks will kick off the first quarter earnings period Wednesday (April 13) as Arkansas’ publicly concerns wrangle with the multi-faceted pressures of higher commodity and energy prices.

On one hand, rising fuel and raw-material costs threaten to slash profits and throttle capital spending. On the other side of the equation are fears that consumers will slash their own budgets as inflationary pressures continue to mute economic recovery.

For example, Bill Simon, the CEO of Wal-Mart U.S., made news recently when he told the USA TODAY editorial board that inflation is “going to be serious” in the next few months. In a bid to keep as many customers in an inflationary environment, the world’s largest retailer is responding, announced Monday (April 11) it will do more to lower prices and will return about 8,500 items back to store shelves.

EARNINGS PESSIMISM
A recent poll by Bank of America noted that there has been a sharp decline in investor sentiment on corporate profitability and global growth. A net 24% of asset allocators now expect corporate operating margins to fall over the next 12 months, according to Bank of America’s Merrill Lynch Survey of Fund Managers for the month of March. This represents the sharpest month-on-month decline since the survey began asking this question in 2004.

"The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

Furthermore, the Bank of America survey noted that many investors are increasing cash holdings while reducing exposure to equities and commodities.

“If the oil price reverses, this change in sentiment could prove quite fleeting. There has been no massive sell-off. Investors are in a ‘wait-and-see’ mode,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Despite the fears, Wall Street analysts are still picking several second quarter winners among Arkansas’ dwindling list of publicly traded concerns companies.

ARKANSAS WINNERS
The most obvious beneficiary of the higher commodity prices is expected to be El Dorado’s Murphy Oil Corp. The energy exploration and distribution company touched a 52-week high of $77.83 at the end of last week’s trading session in sync with the news from the New York Mercantile Exchange that international crude oil prices had topped a 30-month high.

Meanwhile, the International Monetary Fund announced on Monday that it now expects the global oil price to average $107 a barrel this year and $108 a barrel in 2012. The new forecast is a whopping 37.2% spike from IMF’s previous 2011 forecast of $78 a barrel.

In the fourth quarter of 2010, Murphy’s worldwide crude oil, condensate and gas liquids sales prices averaged $73.60 per barrel.

On average, Wall Street analysts expect Murphy to post first quarter earnings of 93 cents on revenue of $6.73 billion, according to Thomson Reuters. Last year, the Arkansas oil giant reported first quarter earnings of 77 cents per share.

Wall Street also expects Arkansas sector leaders J.B. Hunt Transport Services and Tyson Foods to beat the Street average. Although the cost of grain and raising livestock is more expense and meat prices have jumped substantially, several analysts recently upgraded Tyson’s second quarter and yearly expectations due to greater export demand due to the Japan earthquake and high food prices in China.

Analysts expect J.B. Hunt Transport to report earnings of 38 cents per share on sales of $966 million, versus year ago profits of 29 cents per share on revenue of $844 million.

J.B. Hunt touched a 52-week high of $46.11 on April 7, and the Arkansas trucking firm’s stock price is up 23.9 percent over the past year, more than doubling the S&P average of 10.7%.

TRUCKING, BANKING MOVES
On the other side of the ledger, headwinds from higher diesel fuel costs and other operating costs are expected to affect the profitability of Arkansas’ smaller trucking firms.

Van Buren-based USA Truck is estimated to lose 25 cents per share, an improvement, however, from the loss of 29 cents per share a year ago. Fort Smith-based Arkansas Best Corp., the parent company of ABF Freight System, is expected to lose 22 cents per share, also an improvement over the 85 cents per share loss of a year ago.

Arkansas retail stocks are expected to improve year-over-year, but higher food and gas prices for consumers could cut overall sales and drive up corporate expenses.

In the financial sector, earnings for Bank of the Ozarks and Home Bancshares are expected to fall short of last year’s results as corporate expenses and loan losses are expected to mute profits. Yet, Simmons First National of Pine Bluff is expected to get a first quarter earnings boost from its recent FDIC-assisted acquisition of Security Savings Bank of Olathe, Kan.

This week, Bank of the Ozarks is expected to report its first quarter results after the close of business on Wednesday. J.B. Hunt will follow the next day.