Last updated: January 24, 2012 9:18 pm

Wall Street hampered by soft earnings

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An earnings miss by Zions Bancorporation highlighted the ongoing risk to US banks from souring loan securities.

Utah-based Zions, which owns a group of banks in southern and western states, fell 7.6 per cent to $17.15 as it booked a $12.1m, or four cents a share, charge on collateralised debt obligation securities in the fourth quarter.

Overall per share earnings of 24 cents were 9 cents lower than expected.

Zions followed the trend in fourth-quarter bank results, reporting a fall in non-performing assets over the fourth quarter and reducing reserves set aside for losses from loans made by the bank itself.

But Zions recognised losses on securities the bank holds from CDOs, instruments which issue securities backed by the debt of low-rated companies.

$4.3m of the CDO losses resulted from the bankruptcy of a homebuilder, while Zions also said its CDO portfolio “had exposure to 24 of the 92 bank failures that occurred in 2011”.

The CDO charge was four times greater than expected by Stifel Nicolaus analysts, who removed their “buy” recommendation on the stock, although Brian Zabora at Stifel, said no other bank he covered had a portfolio of CDO securities, “so this issue should be pretty unique to Zion”.

Zion’s report added to a gloomy start to earnings season by financials, which are so far showing year-on-year earnings growth of 10.4 per cent, well short of consensus analyst expectations of 20.7 per cent at the start of the season

“With financial sector heavyweights generally ... dragging down early fourth-quarter results, the rest of the S&P 500 will have work to do to drag index earnings back toward expectations in the weeks ahead,” said Gina Martin Adams, a senior analyst at Wells Fargo.

The S&P 500 snapped a 5-day rally to close down 0.1 per cent at 1,314.63. The benchmark US index had opened sharply lower after Standard & Poor’s, the rating agency, said it would likely declare Greece in “selective default” once the country concludes its debt restructuring, but the index pared losses on positive US economic data.

The Dow Jones Industrial Average fell 0.3 per cent to 12,675.75 but the Nasdaq Composite index ticked up 0.1 per cent to 2,786.64

Stocks were further boosted after the close of trading, when Apple reported record fiscal first-quarter profits and revenues, easily surpassing analyst expectations as iPhone sales surged. That sent Nasdaq futures up 24½ points in after-hours trading.

Apple rose as much as 12 per cent to $468 in after-hours after it closed in regular trading at $420.41, down 1.6 per cent.

Tech stocks had already outperformed after fourth-quarter sales at Western Digital , the hard disc drive manufacturer came in significantly above expectations, given the disruption to the company’s supply chain caused by flooding in Thailand. Shares rose 6.3 per cent to $36.88.

“Our thesis that WD can systematically recover and gain share is playing out much faster than anticipated with much higher profit,” Ben Reitzes at Barclays Capital told clients.

That helped semiconductor manufacturers, which build components for hard disc drives, and the Philadelphia Sox index of semiconductor stocks climbed 0.4 per cent.

Data storage computer manufacturer EMC Corp climbed 7.3 per cent to $25.14 as fourth-quarter earnings rose almost a third year-on-year. Disruption to Western Digital’s supply chain had left EMC facing higher prices for hard disc drives, “but the company has done a great job of getting its allocation of disc drives without suffering too much margin degradation,” said Jason Noland at RW Baird.

Nasdaq futures accelerated further in after-hours trading, after Apple reported fourth-quarter earnings that were 30 per cent above consensus expectations, and also offered strong guidance for the current quarter.

Verizon Communications fell 1.6 per cent to $37.79 after reporting an overall net loss of $2.02bn, hampered by pension costs and lower margins on smartphone sales.

Investors continued to express doubts in the new management team at Research In Motion, sending shares in the BlackBerry handset manufacturer down 3.5 per cent to 15.01, barely 50 cents higher than they started the year.

Investment bank Jefferies said RIM is at a “cost disadvantage” compared with other smartphone producers and that significant restructuring will be necessary to compete in the future.

McDonald’s reported strong fourth-quarter earnings with net income rising 11 per cent from a year ago but share sold off 2.2 per cent to $98.75.

Insurance group Travelers narrowly missed analyst estimates, logging $618m of net income in the fourth quarter compared with forecasts of $620m but its shares fell 3.8 per cent to $58.00 for the worst performance in the Dow Jones.

Kimberly-Clark also succumbed to disappointment surrounding its fourth-quarter earnings. The maker of Kleenex tissues and Huggies nappies reported that net income fell 19 per cent from a year ago and that it expected a “difficult” start to 2012. Its shares were off 1.7 per cent to $72.27.

Coach climbed 5.8 per cent to $67.97 as the luxury retailer defied the gloom cast by Tiffany, which earlier this year reported a year-on-year fall in holiday sales at its flagship New York store. Same-store sales at Coach’s North American stores were up 8.8 per cent.

Peabody Energy , the largest US coal producer, fell 1.7 per cent to $36.86 after fourth-quarter earnings missed analyst estimates because of lower output at its Australian operations.

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