DJ IN THE MONEY: Expectations Game Comes Back To Haunt Cos
06 Mar 08:15
(This column was first published Monday)
By Michael Rapoport
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--If you want a reason the market isn't likely to sustain
any sort of decent rally anytime soon, look no further than the old
earnings-expectations game, the same one that companies used to play so well.
Remember how it used to be, in the good old days that ended, oh, six months
ago? Then as now, meeting the earnings estimates of Wall Street analysts was
all-important for companies, but they had a pretty easy out - just lowball
their guidance to analysts so that they'd meet or beat the resulting
over-conservative estimates without any trouble and look good to the market.
Under those circumstances, any company that actually missed estimates was seen
as being a) too honest for its own good, and/or b) in deep trouble.
But now, with the economy sagging - not to mention that nettlesome Regulation
FD - the expectations game has gotten out of companies' control. A lot of
companies, especially technology companies, are finding that the economy is
leaving them little choice but to scale back their earnings outlooks - and the
result is that it doesn't look like the hammered-down market will recover for a
while.
Of the stocks in the Nasdaq 100 - the largest stocks on Nasdaq, many of them
tech companies - 34 have already issued some sort of lower outlook for the
current quarter, the year or both. Those 34 include five of the seven largest
stocks in the index, as measured by market capitalization: Intel Corp. (INTC),
Cisco Systems Inc. (CSCO), Oracle Corp. (ORCL), Sun Microsystems Inc. (SUNW)
and Dell Computer Corp. (DELL).
But it's not just tech stocks. Seven of the 30 giants that make up the Dow
Jones Industrial Average have also issued warnings recently. Those seven
include Intel, which is in both the Dow and the Nasdaq 100, as well as fellow
tech company Hewlett-Packard Co. (HWP), but it also includes distinctly
non-tech companies like Caterpillar Inc. (CAT) and Procter & Gamble Co. (PG).
Think about what that means. That means there's going to be bad earnings news
a-plenty to ripple through the market at least through the end of April or so,
and to an extent until the end of 2001. No wonder the Nasdaq Composite is
flirting with the 2000 mark and the Standard & Poor's 500-stock index with
bear-market levels. And no wonder some investors are on the verge of writing
off this year as lost and looking toward 2002.
"I think the earliest we could hit bottom would be the fourth quarter," said
Chuck Hill, director of research at First Call/Thomson Financial. "We haven't
really seen many companies capitulate yet" - they're still holding out
unwarranted hope that things will pick up in the second half of this year, he
said.
According to First Call, 68% of the outlooks companies have provided for
their current quarter were warning that the companies would miss expectations,
compared with only 46% at a similar point in the year-ago quarter. One
particularly worrisome sign: More companies issued negative outlooks in
February than in January. That's contrary to the usual trend, in which outlooks
are bunched toward the beginning and end of a quarter with a lull in between,
and it suggests that earnings warnings could climb to new heights this quarter.
In fact, the number of negative preannouncements for this quarter is up 61%
compared with the same point in the fourth quarter of 2000, Hill says. "I think
it'll be a record."
No doubt at least some of this flurry of warnings has to do with Reg FD, the
Securities and Exchange Commission's dictate that companies must disclose
market-moving information to everyone at the same time, instead of giving it
privately to analysts. This is the first full quarter for FD - it took effect
in late October, more than halfway through last year's fourth quarter - and
there seems little question that it's prompting more companies to issue more
information more broadly. The SEC's broader campaign against earnings
"management" is probably also prompting companies to be more realistic in their
forecasts.
But Hill thinks it's mostly the economy, not FD, that's resulting in so many
negative outlooks. "It's more the environment."
Note that the Federal Reserve, and whether it will or won't cut interest
rates, enters into this analysis not at all (except, of course, in the sense
that Fed-watchers play their own expectations game over when the Fed will alter
rates and by how much). Remember that the Fed cut rates twice in January,
totaling a full percentage point, and the resulting jump in the market was
short-lived - the major market indices are all now below their levels of early
January, before the Fed's cuts. The cuts could yet help stimulate the economy,
but the effects haven't shown up yet, and they certainly haven't done much for
the market.
It's certainly possible that the economy and FD are simply spurring companies
to issue warnings earlier than they would have otherwise, or to err on the side
of caution, issuing outlooks at the first sign of bad news when they might turn
out not to be necessary. It's also possible that to some extent, the
expectation of further bad news is already factored into stocks' current
prices, and that any sign of economic recovery could spur a rally.
But it's also possible that we're far from seeing the last of earnings
warnings. We're still nearly a month away from the end of the quarter. The
traditional earnings-preannouncement season hasn't even begun yet.
Let's see, in addition to those 34 stocks in the Nasdaq 100 that have issued
warnings, another 11 have issued positive outlooks, and 10 more have said they
expect earnings in line with expectations.
That leaves 45 that haven't said anythingso far. Any bets that any outlooks
coming out of those companies are going to be positive rather than negative?
I didn't think so.
-By Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(END) DOW JONES NEWS 03-06-01
08:15 AM |
