Investors Start Doubting Second-Half Rebound in U.S. Profits
By Jim Finkle - 03/08 11:22
Redwood City, California, March 8 (Bloomberg) -- Oracle Corp. kept telling
investors it wasn't like the other computer-related technology companies serving
up earnings disappointments.
Until last Thursday that is, when the No. 1 database software maker said profit in
the quarter ended Feb. 28 fell short of estimates and that it wasn't sure when
earnings growth would bounce back. Like Microsoft Corp., Intel Corp., Gap Inc.
and droves of others before it, Oracle blamed the economic slowdown.
Oracle's about-face mirrors a shift in sentiment on corporate earnings and the
U.S. economy. Just a few weeks ago, many investors and analysts said
earnings would rise little if at all in the first half of 2001 before recovering in the
second six months. Now they say a second-half rebound is less likely.
``There has been a false optimism that the economy is going to be much
stronger in the second half,'' said Jerry Dodson, fund manager of the Parnassus
Fund. ``I see no hard evidence that the second half is going to be any better.''
Dodson is so skeptical of forecasts for resurgent profits in the second half that
his fund is holding a record 55 percent of its $370 million in assets in cash.
The scale of the slowdown can be seen in the number of companies saying their
earnings won't meet estimates. There still are three weeks left in the first quarter
and as of Tuesday, 426 companies had reduced forecasts for the period,
according to First Call/Thomson Financial, a service that tracks analysts'
earnings projections. At the same point in the fourth quarter, 277 had trimmed
their estimates.
`Off a Cliff'
``From the beginning of February we began to hear that things were dropping off a
cliff,'' said Timothy Ghriskey, a fund manager with Dreyfus Corp., which manages
about $140 billion.
He said he doesn't expect profit growth to pick up again until at least the fourth
quarter, especially for computer-related and other technology companies.
Information technology ``budgets are easy budgets to cut,'' Ghriskey said.
``There is no penalty to putting off this type of investment.''
Wall Street analysts now expect first-quarter profits to drop 25 percent from a
year earlier at makers of software, computers and other information-technology
equipment in the Standard & Poor's 500 Index, according to First Call. Two
months ago, they projected a 4 percent gain.
``The picture is very bleak.'' said Chuck Hill, First Call's research director.
``Expectations are in free fall.''
That is reflected in the performance of the Nasdaq Composite Index, which is
loaded with computer-related and other technology companies. The index had
dropped 56 percent from its peak on March 10 last year.
Earnings Decline
Analysts anticipate overall first-quarter earnings of the S&P 500 companies to
drop 5 percent from last year. That would be the first decline since 1998, when
results were scarred by Russia's default on its debt, Asian currency devaluations
and the collapse of Long-Term Capital Management.
``It's quite simple,'' said Eric Hull, a fund manager with Jurika & Voyles, which
manages about $2 billion. ``The economy is teetering on the edge of recession.''
The slump has hurt companies in all sorts of industries. Last week, Gap said
fiscal first-quarter profit may miss forecasts because the apparel retailer's sales
at stores open a year of more fell in February. US Airways Group Inc. said it will
have a larger first-quarter loss than forecast because of cuts in travel budgets by
businesses, which often book tickets on short notice at higher fares.
Slowest Rate
Some economic figures suggest the economy is growing at its slowest rate in
half a decade. U.S. consumer confidence last month fell to its lowest level since
June 1996. That followed a report that the U.S. economy grew by its slowest
pace in 5 1/2 years during the fourth quarter.
``We're in a significant economic downturn,'' Henry Nicholas, chief executive of
communications chipmaker Broadcom Corp., said Tuesday at an investor
conference as Broadcom said first-quarter results will lag forecasts.
Some investors and economists said there are some signals that the worst may
be over.
``I'm thinking that this slowdown is going to be shorter and shallower than
consensus,'' said Fritz Meyer, manager of the Invesco Growth and Income Fund.
``Things always look worst before the sun comes out.''
Even Federal Reserve Chairman Alan Greenspan has struck a more optmistic
tone in his latest public pronouncements.
``The exceptional degree of slowing so evident toward the end of last year
seemed less evident in January and February,'' he told the House Financial
Services Committee last week.
Poised for Growth
Among the signs that the economy is poised for faster growth was a government
report Tuesday showing that productivity last year rose 4.3 percent, the most
since a 4.5 percent jump in 1983. That may be evidence investment in computers
and software is helping employees produce more at lower costs even as the
economy cools.
The National Association of Purchasing Management's factory index rose in
February over January, gaining for the first time in a year. And personal spending
on goods and services rose 0.7 percent in January, as consumers bought more
automobiles.
To be sure, Greenspan last week said that the slowdown has ``yet to run its full
course.'' That's why the Fed twice cut interest rates a half percentage point in
January. Analysts and investors anticipate another half-point cut later this month.
It will take time for lower borrowing costs to filter through, economists said, and
their effect probably won't show up in corporate earnings until at least the end of
the year.
With each day bringing a new round of companies saying earnings will be clipped
by the slowdown, executives may give up trying to predict when earnings growth
will recover.
``The hard reality is that nobody knows exactly how deep and how long this
slowdown is going to last,'' said Oracle Chief Financial Officer Jeff Henley.
``We're sitting here like everybody else and kind of scratching our heads.'' |
