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U.S. investors look for quick rebound from winter doldrums

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York April 4, 2014. REUTERS/Lucas Jackson
Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York April 4, 2014. REUTERS/Lucas Jackson

By Caroline Valetkevitch

NEW YORK (Reuters) - Companies across America are blaming the brutal winter for weak first-quarter results, but investors are expecting a quick rebound in the second quarter and will likely judge harshly companies that are less optimistic about a recovery.

The ice, snow and freezing temperatures kept consumers out of stores, grounded planes and snarled transportation, and raised heating costs for businesses and homes alike in the first three months of the year. Weather was mentioned in 219 S&P 500 earnings conference calls between January 1 and April 1, compared with just 125 in the first three months of 2013.

Investors in the past have generally cast a jaundiced eye at companies that blame the weather for poor results, but this winter was different.

"The truth is the weather did really hurt things," said Randy Warren, chief investment officer of Warren Financial Service in Exton, Pennsylvania.

So "people will be really looking for the guidance this time to see whether the CEOs are going to tell us that they've already seen a pickup, a spring thaw."

Recent data on U.S. auto sales and housing activity have suggest a snapback from the weak weather. Economists at Bank of America/Merrill Lynch forecast the U.S. economy will grow between 3 and 3.5 percent in the next three quarters, noting increased small business hiring intentions and a stronger outlook for capital expenditures.

That would be an improvement from median forecasts for 1.9 percent growth in the first quarter.

Profit projections had dropped sharply during the first quarter. Expectations are now for earnings growth of 1.2 percent from a year ago, compared with an estimate of 6.5 percent on January 1, according to Thomson Reuters data. Every sector but utilities saw reduced estimates through the quarter.

Profit growth for the second quarter is forecast at a much stronger 8.5 percent, down just slightly from a January 1 estimate of 9.7 percent, the Thomson Reuters data showed.

FOOT TRAFFIC

In the first three months of 2014, weather was cited in 42 conference calls from consumer discretionary companies, which include apparel retailers Urban Outfitters and American Eagle Outfitters, compared with 29 a year ago. Estimated growth for the sector fell to 6.1 percent from 14.5 percent.

Consumer discretionary shares declined 3.2 percent in the first quarter, trailing the S&P 500, which gained 1.3 percent.

Some companies in the branded apparel and footwear space may not see a big rebound in coming months, Morgan Stanley analyst Jay Sole said. The firm cited ShopperTrak data that shows consumers are visiting fewer stores when going to the mall and are pre-shopping online, hurting pricing and sales. That trend is becoming more pronounced every year, it said.

"That is a change not affected by the weather; it's a permanent change in shopping behavior," said Sole.

Among those who saw a positive from the cold weather were home improvement retailers Home Depot and Lowe's, which cited increased sales of snowblowers, space heaters and ice melt in their February sales reports.

Another winning sector in the first quarter was utilities - growth estimates rose to 7.7 percent from 1.6 percent on January 1. The S&P utility index led all S&P sectors with a 9 percent gain for the quarter. Investors saw utilities as a safe-haven, high-yield option, but the benefit of cold weather may be temporary.

INDUSTRIALS HIT

In the industrial sector, quarterly profit growth estimates have fallen to 0.2 percent from 5.0 percent on January 1.

The harsh winter boosted labor costs because of overtime and shipping delays. Order backlogs notably rose during the winter, according to purchasing managers' surveys. That bottleneck has been alleviated, and surveys of purchasing managers show an improved outlook for new orders.

The weather drag should be short-term, said Keith Schoonmaker, equity analyst at Morningstar in Chicago. "We don't think it disrupts the competitive advantages" for many of these companies, he added.

In the first three months of the year, roughly 87,000 U.S. flights were canceled, more than double a year ago, based on data from FlightAware.com. Some of those flights have or will be rebooked, but it does mean some lost income for airlines, S&P-Dow Jones Indices earnings analyst Howard Silverblatt said.

Delta Air Lines this week said the weather resulted in more than 17,000 flight cancellations during the quarter, reducing revenue by $90 million. But shares of Delta rose 26 percent in the quarter, while United Continental Holdings gained 18 percent, suggesting some investors see the weather setback as temporary.

"I think investors are giving them a pass," Warren said.

(Reporting by Caroline Valetkevitch; Editing by David Gaffen)

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