U.S. 2nd-Qtr Corporate Profits to Rise 18%:
Industry OutlookBloomberg News
Wed, 28 Jun 2000, 9:12pm EDT
U.S. 2nd-Qtr Corporate Profits to Rise 18%: Industry Outlook
By Steve Matthews
New York, June 28 (Bloomberg) -- U.S. second-quarter corporate profits will rise 18 percent, driven by demand for equipment to tap and expand the Internet and a rebound in raw materials prices, analysts say.
An 83 percent increase in crude oil prices in the past year will help per-share profit almost double at Exxon Mobil Corp., the largest public oil company. Earnings will rise by almost a third at Texas Instruments Inc., whose chips power most cellular phones. Passenger traffic, which is rising twice as fast as airlines can add seats, will fuel profit for the three largest carriers.
The reason behind the gains is the U.S. economy, which is in its 10th year of a record-setting expansion. The Federal Reserve Board has raised interest rates six times in the past year to cool the economy, yet the impact will be felt only faintly with slowing profit growth for banks, automakers and retailers.
``Corporate earnings still look very healthy,'' said Chuck Stutenroth, portfolio manager with Fort Washington Investment Advisers in Cincinnati, which manages $22 billion. ``You are seeing margins rise across many industries.''
Because most companies beat forecasts, per-share earnings for the companies in the Standard & Poor's 500 Index are likely to jump 22 percent, said Chuck Hill, director of research at First Call/Thomson Financial, which compiles analysts' estimates. A year ago, earnings rose 15 percent.
Earnings gains have exceeded 20 percent for the past three quarters -- the only time that's happened in the decade that First Call's been keeping track of earnings, Hill said.
``This round of corporate profits will be incredible,'' said Louis Navellier, president of Navellier & Associates, which manages $6 billion in assets.
Demand for Semiconductors, Energy
The gains likely won't last. Analysts are forecasting a 19 percent increase for the third quarter and 17 percent for the fourth, and higher rates may cut into those forecasts, Hill said.
Still, ``We trust in Alan Greenspan that he can engineer a soft landing as he has done in the past,'' said Stutenroth, who has been adding to holdings of semiconductor makers Texas Instruments and Xilinx Inc.
Expectations that earnings will top forecasts, particularly at computer-related companies such as semiconductor makers, have helped to power the Nasdaq Composite Index. The index is up 14 percent in the past month and about half in the past year.
Profit at Intel Corp., the largest computer chipmaker, will rise on demand for its networking and communications chips. Intel shares have surged 63 percent this year, the most in the Dow Jones Industrial Average. Cisco Systems Inc.'s earnings will increase as the No. 1 maker of computer networking equipment boosted sales to Internet service providers.
``Corporate profits are going to continue to be strong for the foreseeable future,'' said Peter Sorrentino, manager of domestic equity research for Bartlett & Co., which has $2.7 billion in assets and has been adding to shares of Texas Instruments and Intel.
Per-share profit will surge at the three largest oil producers -- more than doubling at Chevron Corp. and Texaco Inc. -- because oil prices rose as countries such as Saudi Arabia and Mexico cut production. The companies have become more selective where to drill to avoid becoming overextended if prices fall.
``The industry is showing a new discipline,'' said Fadel Gheit, analyst at Fahnestock & Co.
Airlines, Health Insurers
The three biggest airlines -- UAL Corp.'s United Airlines, AMR Corp.'s American Airlines and Delta Air Lines Inc. -- will see higher profit because of increased travel and three increases in ticket prices this year.
The number of passengers at the 10 largest carriers leaped almost 8.9 percent in May and 7.2 percent in April, as the strength of the U.S. economy, a rebound of economies in Asia and the start of summer vacations spurred more travel. Traffic rose faster than the airlines added seats.
Profit for health-care providers will rise 17 percent, as insurers including UnitedHealth Group Inc., Oxford Health Plans Inc. and Aetna Inc. charged more for coverage. Insurers also are dropping Medicare patients because they say government reimbursements for health care to the elderly don't cover costs.
``We've just seen in the past year a turnaround in premiums to where they're rising more than medical costs,'' said PaineWebber analyst William McKeever.
Higher Rates Hurt
The highest short-term borrowing rates in nine years have started to hurt earnings at some banks, homebuilders, retailers and automakers.
Declining sales in June, particularly in the Midwest, will hurt earnings of Ford Motor Co., General Motors Corp. and DaimlerChrysler AG. Ford, the world's No. 2 automaker, is forecast to earn $2.01 a share, compared with $2 a year earlier.
``June is the first month where we've got some serious problems with volume,'' said David Littmann, a senior economist with Comerica Bank in Detroit.
Profit at Wachovia Corp., the third-largest Southeast bank, will fall by almost half as it adds $200 million to its reserve for loan losses. Rising rates are making it harder for some customers to meet loan payments.
``A lot of the regional banks are going to have problems,'' money manager Sorrentino said.
At Centex Corp., one of the largest homebuilders, profit will decline because higher rates hurt home sales.
Retailers
Retail sales fell for a second straight month in May, by 0.3 percent, led by auto dealers and sellers of big-ticket merchandise. It was the first back-to-back drop since July-August 1998, when stocks plunged after Russia defaulted on its debt.
Profit at Office Depot Inc. will decline almost 10 percent. The biggest office-supply retailer warned in May that it has been hurt by lower-than-expected sales of computers and the euro, which has fallen 6 percent this year against the dollar.
Costco Wholesale Corp.'s earnings will rise 10 percent, less than earlier forecasts, because of increased costs of adding its discount stores and rising wages.
``The consumer is cooling his or her jets right now,'' money manager Navellier said.
Procter & Gamble Co. said profit will be unchanged from a year ago. The largest U.S. maker of household products has been hurt by higher oil and paper prices and lower-than-forecast sales of new products such as its Dryel home-dry-cleaning kit.
The company has been the worst performer in the Dow Jones Industrial Average this year, with its stock falling 49 percent.
Best Regards, J.T. |
