6/18/2010
By Brian Sozzi, Research Analyst

The market has logged good sessions this week, better yet it has maintained an upside bias since June 8. I think this is impressive given all the rumblings on a global scale.  Investors were hit with a litany of punches this week, including less than inspiring economic data, countries having to pay higher yields on debt issuances, and the flogging of the BP CEO by a group of individuals as responsible for the Gulf Coast tragedy as Mr. Hayward.  Investors basically shrugged off all this news, Spain's pre-note auction jitters, and a confliction of sorts with respect to the outcome of second quarter earnings season. There seems to be two decidedly opposing camps prior to the second quarter earnings releases, which is counter to the general consensus that emerged ahead of fourth quarter and first quarter earnings. Camp one expects strong corporate earnings driven by a top line recovery for domestic businesses and continued robust demand in emerging markets, and associated operating expense leverage.  This camp expects in line to slightly above consensus guidance for the year and for these factors to propel the broader market. Pre-announcements from Caterpillar (CAT), Illinois Tool Works (ITW), and McKesson earlier this week support their bullish thesis on risk assets.

On the other side of the debate, there are those bracing for earnings misses on a stronger U.S. dollar and analyst expectations that remain too starry-eyed. If this goes down, stocks come under renewed selling pressure. The aforementioned pre-announcement from FedEx (FDX) support this camp's line of thinking.  What do I hold true? All of this indecisiveness spells opportunity, especially as equities have had air released from their valuation balloon over the last six weeks.

Caterpillar

* Stock performance from April 26: -16.0%
* 127 dealers outside of the U.S.
* Operations in 182 countries
* 69% of annual revenues derived outside of the U.S.
* What management said: Reiterated EPS guidance range of $2.50 to $3.25 against consensus of $3.16.
* What I say: For the sake of shareholders, management best be leaning toward narrowing the bottom end of the guidance range when earnings are reported in July.  The stock has been bid up this week on optimism the bottom end of guidance is off the table.  At the core, the reiteration signals there has not been any material degradation in the business.  If there had been, the top end would have been slashed and a new bottom end would have come into focus.

Illinois Tool Works

* Stock price performance from April 26: -13.2%
* Operates in 57 countries
* 57% of revenues outside of the U.S.
* What management said: Issued 2Q guidance of $0.81 to $0.86 compared to the $0.81 consensus following strong double-digit percentage top line growth in most segments of business.
* What I say: One of the more encouraging pre-announcements thus far.

FedEx

* Stock price performance from April 26: -2.1%
* Serves 220 countries around the world
* What management said: Reported 4Q earnings $0.01 ahead of consensus forecasts, but served up a FY range that was some $0.65 below consensus on the low-end.  Increased investments, cautiousness, and healthcare costs contributed to the less than exciting outlook.
* What I say: One of the more troubling pre-announcements thus far given the company's reach throughout areas of the economy, across the world.

McKesson

* Stock price performance from April 26: Flat
* Operates primarily in U.S. and Canada
* What management said:  Not a heck of a lot, except to reiterate FY earnings guidance.
* What I say: One of the least important earnings pre-announcements.  If anything, it suggests those enrolled in health plans are better able to spend on medications and there haven't been anymore wide scale layoffs where people fall off company insurance plans.  Generics continue to be a major industry driver, though I am disappointed by the lack of color on the healthcare IT segment trends.  I rate the stock a buy with a price target of $78.00 for our institutional service.

Brian Sozzi
Wall Street Strategies