Tech Profits Expected to Surge this Year

Wall-Street

So where will many of those snazzy handheld devices and new Internet commerce platforms seen at International CES last week end up this year?

One answer: padding the income statements of tech companies.

On the eve of earnings-reporting season, when public companies will release full-year 2013 results and share their initial forecasts for this year, the outlook for the tech industry is a rosy one.

In 2014, technology companies in the S&P 500 index are expected to earn net income that’s 9.3% higher than last year, according to FactSet, which compiles Wall Street earnings estimates.

While that’s slightly lower than the 10.5% rise expected for the index as a whole, it’s much better than the tech industry’s profit growth last year, which is expected to have been 1.9% after all reports are in.

And it’s not just higher sales of smartphones, TVs, storage gear, software and other tech products that are adding to corporate coffers.

Net income is seen rising even faster than revenue, which is expected to climb 5.5%, as tech companies squeeze ever more profit out of each dollar of sales.

That mirrors a broader U.S. trend, as corporate operating profit margins are expected to reach an all-time high this year of 10% of revenue.

The average margin for the tech sector, which on an annual basis is consistently among the most profitable U.S. industries, is expected to come in between 15% and 16% in 2014.

Optimism for 2014 tech profit growth helps explain why the Nasdaq Composite index surged an eye-popping 38% last year, even better than the S&P 500’s 30% annual gain.

Yet many on Wall Street believe tech shares still have more room to run in 2014, as the expected profit growth will keep average price-to-earnings ratios roughly in-line with historical averages.

Tech stocks had a forward price-to-earnings ratio of 15.5 as of last week. While that’s higher than the five-year average of 13.7, it’s below the 10-year average of 16.7.

Still, all those figures are based on Wall Street estimates.

Coming right up

This week, investors will start hearing full-year forecasts straight from tech company executives. Among the largest technology companies, No. 1 chip-maker Intel will help kick off the earnings season with its report Jan. 16. The company’s 2014 sales and profit are seen as flat with last year amid the PC industry’s woes.

Next week will come reports from hardware giant IBM (on Jan. 21), online retailer eBay (Jan. 22) and No. 1 software maker Microsoft (Jan. 23).

Microsoft’s profit for the fiscal year ending in June is seen flat with a year earlier, even though sales are expected to rise 7%.

In addition to Microsoft’s results and forecast, investors will want to hear an update on the company’s search for a new leader to replace its outgoing CEO, Steve Ballmer.

Another big week

While Intel, IBM and Microsoft are all large enough to move the broader stock market with earnings news, the wildest tech trading action may well come during the last week of January.

That week will see reports and forecasts from a raft of big tech names, including Apple (Jan. 27), Yahoo (Jan. 28), Qualcomm (Jan. 29), Facebook (Jan. 29) and Google (Jan.30).

Apple’s profit for the fiscal year ending in September is expected to rise 10%, while revenue is seen climbing 8%, powered by iPhone and iPad sales.

Smartphone chip-maker Qualcomm’s profit is also seen rising about 10% — roughly in line with industry growth, while net income at Google and Facebook is seen surging even faster, thanks to online ad sales.

Other notable tech firms, including Twitter, Cisco Systems and Hewlett-Packard, will report in February.

Once the earnings season is done, investors will have a much better idea of whether Wall Street’s bullish forecasts for tech companies — and their share prices — are justified.

USA TODAY

 

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