Wall Street: Earnings Rout Ahead - Look Out Below!

HOLD ONTO YOUR HATS -- THE RIDE'S ABOUT TO GET really rough. Would you believe negative $7.56-a-share earnings on the Standard & Poor's 500 for fourth-quarter '08 earnings?

William Waitzman

That's according to Howard Silverblatt, senior index analyst at Standard & Poor's. "There has never been an as-reported index level in the red," says Silverblatt. In the devastating fourth quarter, "companies started throwing in the kitchen sink, then moved to the refrigerator, and are in the dining room now," Silverblatt quips.

Unfortunately, with about 77% of companies in the index having already issued their fourth-quarter financial statements, the level of as-reported earnings, which include charges, now exceeds on the downside the level of operating earnings, $6.58 a share, on the upside.

That is no surprise to Charlie Minter and Marty Weiner, portfolio managers at Comstock Partners, who put up impressive 55% returns for 2008. They say that while S&P just lowered operating-earnings estimates to $58 from $66 for '08, and to $69 from $82 for '09 -- and as-reported earnings estimates to $35 from $45 for '08 -- strategists haven't adjusted their S&P targets to the new figures.

Minter and Weiner say strategists' assertions that the market is undervalued are overblown, both because they are based on old operating-earnings estimates, and because those earnings don't reflect the true picture. The Comstock managers use a smoothed estimate of $64 for '09 earnings, and a multiple of 10, the average trough multiple over the past 75 years, to get a forward estimate of 640 on the S&P -- 24% below its current level.

Edited by ROBIN GOLDWYN BLUMENTHAL  | MORE ARTICLES BY AUTHOR

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