2Q Sector Earnings Preview
SECTOR EST. 2Q
EPS GROWTH
Technology 34%
Consumer Cyclicals 26
Communications 14
Transportation 13
Financial 12
Health Care 10
Capital Goods 9
Consumer Staples 3
Utilities 2
Basic Materials -4
Energy -18
Source: First Call
NOW THAT the Federal Reserve's action on rates is yesterday's news, the focus in the coming weeks will be on corporate earnings. "And the news will obviously be very good on that front," says Chuck Hill, director of research at First Call, which compiles earnings estimates from analysts.
Second-quarter earnings season officially starts the week of July 12, but a few companies (notably Yahoo! (YHOO)) will report earlier. Overall, corporate profits have been gaining steam since falling 3.1% in the third quarter of last year. Right now, First Call figures that profits in the second quarter (which ended Wednesday) are expected to rise 11.4% from a year ago. That's ahead of the 10.5% earnings growth posted in the first quarter and 6% in the fourth quarter of 1998. And considering that companies turned in first-quarter profits that were 5.6% higher than expected, Hill says that growth in the second quarter could end up being more like 15%. "Analysts are still a little behind [with earnings estimates]," Hill says.
Technology companies are still the earnings leaders. The tech sector is expected to report 34% earnings growth in the quarter. Hill notes that the group has an easy comparison to the second quarter of last year, when it suffered from an oversupply of PCs. But take note: The forecast for tech has been lowered from the 48% earnings growth forecast on April 1 and is down from 42% growth reported in the first quarter. "Up until this quarter, estimates [for tech] were going up," Hill says.
2Q Tech Earnings Preview
SECTOR EST. 2Q
EPS GROWTH
Computers 23%
Communications Equip. 46
Semiconductors 81
Software 24
Source: First Call
Where are the tech trouble spots? The most notable earnings warning came from leading PC maker Compaq (CPQ), which is suffering from competition and management turmoil. Analysts also trimmed estimates for chip king Intel (INTC) because of concerns about falling chip prices and a possible product delay. And every disk-drive maker has warned that earnings will be lower in the second quarter because of pricing pressures. And let's not forget the Y2K bug, which has been putting a damper on software spending. As Hill puts it, "The noise level is getting louder."
Close on tech's heels are consumer cyclicals, whose earnings are projected to be up 26% in the second quarter. This group also has a bit of an easier comparison to last year because of the General Motors (GM) strike in 1998, Hill says. But the forecast still represents a healthy bump up from the 20% earnings growth reported last quarter. Earnings are likely to remain strong as long as spend-happy consumers keep opening their wallets.
The most-improved awards go to transportation, basic materials and energy. Second-quarter earnings for transportation companies are expected to rise 13%, after declining 10% in the first quarter. Basic materials' profits are projected to decline 4%, following a 21% deficit last quarter. Finally, the energy sector is seen posting an 18% drop in profits, after a 45% decline last quarter. Hill notes that analysts expect a dramatic swing to earnings growth in the third quarter for basic materials and energy. "That's why investors are switching back to these sectors," Hill says.
The most disappointing sector is consumer staples, Hill says. High-profile multinational companies such as Coca-Cola (KO), Gillette (G) and Procter & Gamble (PG) have all warned that earnings or sales will be below forecasts because of rough waters overseas. Earnings for the group are expected to be up only 3% in the quarter, compared to usual growth of 10% to 15%. The projections range from 5% earnings growth for tobacco makers to a 13% decline for personal care companies. "These [companies] were considered canaries in the coal mine," Hill says -- the first to swoon when emerging markets tanked. But they haven't been as quick to respond to signs of recovery in those markets. Still, the stocks continue to carry high price-earnings multiples.
The third quarter could be better for consumer staples, especially if economies overseas keep rebounding. In fact, Hill says that overall corporate profit growth is expected to peak in the third quarter, at 21.6%. But analysts usually trim estimates as time goes by. So don't take that forecast to the bank. |
