Saturday July 21 8:05 AM ET ``The good (companies) come out early,'' said Navellier. ``If reports are smelly now, they'll be stinky next week.''
Saturday July 21 8:05 AM ET
Corporate Earns Bad, Seen Getting Worse
By Chelsea Emery
NEW YORK (Reuters) - Corporate America this week smashed Wall Street's few remaining hopes that second-quarter earnings reports will bring anything but a litany of bad news.
Downbeat comments from industry titans like Intel Corp. (NasdaqNM:INTC - news) and International Business Machines Corp. (NYSE:IBM - news) awakened dormant fears of a worldwide slump, profit-killing price wars, and a later-than expected profit recovery.
``We'd been expecting profit reports to be negative because the U.S. economy has slowed so rapidly, but the thing that concerns us now is (global) economic slowing,'' said Sheila Hartnett-Devlin, chief global equity strategist for Fiduciary Trust Co. International.
A stinging price war has hit profit margins of companies like Intel, provoking concern the cutthroat economic environment will force companies to sacrifice earnings for market share. In addition, this week's financial reports showed the strong U.S. dollar and slumping global economies are hurting U.S.-based multinationals more than expected.
Adding to woes, investors who had hoped their companies would show recovery saw hopes dashed by comments from software makers like Micromuse Inc. (NasdaqNM:MUSE - news), which warned sales would remain depressed through early 2002.
That's spoiling the outlook for the rest of the year. Analysts early this month had anticipated S&P 500 companies to show profit growth of 5.2 percent for the fourth quarter, but now forecast just 2.7 percent growth, according to research firm Thomson Financial/First Call.
Chuck Hill, First Call's director of research, predicts analysts will keep cutting estimates and will eventually forecast a profit decline for the fourth quarter.
Almost 1,500 profit reports flooded Wall Street this week. Now investors must gird themselves for another 2,300 next week, from closely watched companies including global fast-food giant McDonald's Corp. (NYSE:MCD - news), the world's largest supplier of fiber-optic components JDS Uniphase Corp. (JDU.TO) (NasdaqNM:JDSU - news), WorldCom Inc. (NasdaqNM:WCOM - news) , an international voice and data services firm, and the United States' No. 2 personal computer maker Compaq Computer Corp. (NYSE:CPQ - news).
EXPECTATIONS SLIDE
A plethora of profit warnings during the corporate ''confession season'' several weeks ago has forced investors to lower their second-quarter profit expectations for companies in the Standard & Poor's 500 index (^SPX - news) to a decline of 17.9 percent, from a fall of 15.8 percent only a month ago, according to Thomson Financial/First Call.
That would be the worst quarterly performance since the third quarter of 1991 when the United States economy was mired in recession, First Call said.
``Earnings are horrific,'' said Louis Navellier, who manages $6 billion for Navellier & Associates in Reno, Nevada.
The profit slide has come as U.S economic growth has slowed from the 1990s. Analysts now forecast an economic growth rate in 2001 of 1.6 percent, according to a Reuters survey. This would mark the weakest growth since 1991, when the U.S. was mired in recession.
``The United States is the economic envy of the world, and our economy is pathetic,'' said Phil Orlando, chief investment officer for Value Line Asset Management, which oversees $6 billion.
OVERSEAS ECONOMIES SUFFER, HURTING U.S. FIRMS
Some say the profit slump is already reflected in stocks and point to the S&P 500, which has sunk about 20 percent since its high in March 2000.
But others suggest the slowing U.S. economy means disaster for overseas economies, which rely on U.S. consumers to buy their products, or invest.
``We're concerned about Pacific Rim, Latin America and major economies throughout the world,'' said Orlando. ``Japan is in recession and that has domino-like implications for the region.''
At the same time, the dollar surged to a 15-year high in July against a basket of currencies of the U.S.'s major trading partners, including Japan and Britain. The strong dollar means U.S. companies' profits will suffer when they translate their overseas sales into U.S. dollars.
``The international situation is very poor for the next 18 months, but that's already in our thinking,'' said Orlando. ``If it rolls into 2003'' it'll be bad news, he said.
Money managers also will closely monitor price wars.
``You have to make sure your company is able to gain market share without pricing aggressively,'' said Hartnett-Devlin.
That means investors will pore over PC maker Compaq's report. The company already has said computer price discounts in North America have spread to Europe.
EARNINGS SO FAR
About 12 percent of the S&P 500 companies that have reported so far have missed Wall Street forecasts, compared with a historical average of 20 percent, according to First Call. By contrast, 61 percent have beaten estimates, compared with the average of 59 percent.
Investors should not let these statistics fool them into false optimism, though, money managers warn. It's been relatively easy for companies to beat expectations, as analysts had slashed them during the dismal ``warnings'' period a few weeks ago, when companies admitted they wouldn't make their earlier numbers.
Next week will mark the one of the busiest reporting periods for healthcare companies, whose profits and stocks are often seen as a bastion of safety amid volatile technology issues. Kimberly-Clark Corp. (NYSE:KMB - news) is among companies expected to release earnings results.
As earnings continue to stream in, some say investors should wait to buy more stocks.
``It's not a good idea to buy ahead of the earnings,'' said Hartnett-Devlin. ``Wait until the news is out, when you can take the numbers apart.''
And in terms of market psychology, Wall Street expects next week's reports to be even worse than this week's reports.
``The good (companies) come out early,'' said Navellier. ``If reports are smelly now, they'll be stinky next week.'' |
