Richard / Justa
A Season When No News Is Good News
By ALEX BERENSON
New York Times
Worried about corporate profits?
Don't be.
Confession season arrived last week, as it does every quarter, as predictable as rain in April or ozone alerts in July, with a parade of companies giving Wall Street their sorry earnings news, scaring traders who should know better.
The hard-luck cases this time included Informix, BMC Software and other companies whose names have never crossed most investors' lips, with the possible exception of Computer Associates, an Islandia, N.Y.-based software company known only too well for the gargantuan pay packages it lavishes on its top executives. The news from Computer Associates and BMC helped send down the Nasdaq composite index more than 3 percent on Wednesday, though it recovered its losses by the end of the week.
But forget the losers. Think about the dogs that did not bark, the companies that did not preannounce bad news last week. Hewlett-Packard? Nope. Microsoft, Pfizer, Wal-Mart Stores? Uh-uh, uh-uh, uh-uh. Exxon Mobil? Cisco Systems? Not a chance.
For them, no news likely means good news, because companies that do not preannounce shortfalls nearly always meet or beat analysts' forecasts when they do report their earnings. And with only a few days to go before most publicly traded companies are due to report their profits for the second quarter, earnings warnings are down substantially, compared with last year.
So profits are likely to be way up, according to Charles Hill, research director for First Call/Thomson Financial, which tracks corporate earnings and analysts' forecasts. Hill says analysts are expecting year-over-year earnings growth of 19.3 percent for the quarter for the Standard & Poor's 500 companies. He figures that the real growth rate will be closer to 23 or 24 percent, because analysts typically give companies a bit of room to beat their estimates. Those increases come on top of gains in the first quarter, when earnings at S&P 500 companies rose 23.7 percent, and in 1999, when earnings soared 18 percent, the best rate in five years. By comparison, the long-term earnings growth rate for big publicly traded companies has averaged just 7 percent over the last two generations, Hill said.
This has been a pretty mild preannouncement season, he said. There's no reason for people to be overreacting.
The good news is likely to continue, at least until the end of the year. Joseph Kalinowski, equity strategist for IBES International, which also tracks earnings forecasts, said analysts were still raising their estimates for third- and fourth-quarter profits. "I think we're going to be in for a good second quarter," Kalinowski said.
In fact, the engines that have powered the stock market's decade-long boom are still largely intact. Capital spending on technology remains strong worldwide, and although increases in short-term interest rates and oil prices have slowed U.S. growth slightly, consumer confidence remains high, and inflation appears mild.
Those factors have combined to push operating earnings for the S&P 500 from $32.68 a share in 1994 to an estimated $57.70 this year, Hill said. In 2001, analysts are expecting earnings to rise an additional 15 percent, to $66.65. If that optimistic forecast comes true, it will mean that earnings at America's biggest companies will have more than doubled in seven years, an impressive feat.
To be sure, investors have bid up stock prices even faster over the last seven years, so that by many measures stocks are fully valued. But with inflation quiet, bonds solid and the federal government running a huge surplus, the continuing strong growth in earnings is another piece of good news for investors hoping to get through the summer doldrums in |
