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It's not over till it's over
The profit recession, that is
By Barbara C. Costanza, CBS.MarketWatch.com
Last Update: 8:00 AM ET June 3, 2001
LOS ANGELES (CBS.MW) -- The latest batch of earnings worries, prompted by Regulation FD-inspired warnings, ignited a sell-off on Wall Street over much of the last week, leading many to believe that the spring rally in stocks might have been a bit hasty.
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The sell-off -- which accelerated following the earnings warning that Sun Microsystems (SUNW: news, msgs, alerts) issued after the close of trading May 29 -- has sent both the Nasdaq Composite Index ($COMPQ: news, msgs, alerts) and the Dow Jones Industrial Average ($INDU: news, msgs, alerts) back to levels where they stood when the Federal Reserve last cut interest rates in mid-May.
Included among the hardest-hit sectors have been three areas closely followed by retail and institutional investors alike -- the hardware, chip and networking stocks.
Pre-announcements begin
Dampened prospects for profit growth, of course, continue to sit over these stocks like a black cloud.
Within the broader category of technology, it's a similar situation -- expectations are for a contraction in profit growth on the order of 55 percent on a year-over-year basis.
"Sun is getting factored in, and I'm sure that [percentage] will go lower when analysts include the ramifications of Sun's warning," noted Joe Cooper, research analyst at First Call/Thomson Financial.
Probably the most common theme to surface thus far in the second quarter's confession season can be summed up as "repeat offenders" -- those companies that also warned during the March quarter that Wall Street's expectations for profits were too high.
Along with Sun in this regard, high-profile names -- and one-time stellar stock performers -- that qualify as repeat offenders include Oracle (ORCL: news, msgs, alerts) , National Semiconductor (NSM: news, msgs, alerts) , Motorola (MOT: news, msgs, alerts) and Yahoo (YHOO: news, msgs, alerts) .
But the repeat offenders phenomenon is by no means confined to technology -- a powerful reflection of the continuing fragility in the U.S. economy. Transportation giants like FedEx (FDX: news, msgs, alerts) and UAL (UAL: news, msgs, alerts) also have fallen prey, as have communications companies like Sprint (FON: news, msgs, alerts) and AT&T (T: news, msgs, alerts) .
A pivotal fourth quarter
Much of the buying on Wall Street seen recently has been based on the theory that earnings would improve come the fourth quarter. However, Sun Micro's latest earnings warning significantly diminished such hopes.
The concern now being manifested in investors' decisions to sell stocks anew is that companies' profit warnings will continue to accelerate.
"If we are going to get a recovery in the second half, we should be seeing deceleration instead of acceleration," said Chuck Hill, First Call's director of research, in a reference to companies' pace of pre-announcements.
Data compiled by First Call from securities analysts indicates that fourth-quarter earnings are expected to be down 16 percent year over year -- and that number appears to be growing wider.
By the start of the next quarterly reporting season in July, Hill believes there will be enough "visibility" on earnings prospects to determine if a profit recovery is likely to occur in the fourth quarter or get pushed back to the first quarter of 2002 -- a crucial consideration for investors whose portfolios remain weighted toward growth stocks.
At this point, then, the first quarter appears to be the positive focus on Wall Street, with analysts expecting a 40 percent improvement over the January-through-March quarter of this year. With that in mind, investors might want to adjust their expectations to early 2002 as the "turnaround quarter."
The week ahead
As for more immediate matters, it's shaping up as a predictably light week on the earnings front.
The big names set to release quarterly results are Comverse Technology (CMVT: news, msgs, alerts) on Monday, Albertson's Inc. (ABS: news, msgs, alerts) on Tuesday, Smithfield Foods (SFD: news, msgs, alerts) and Vail Resorts (MTN: news, msgs, alerts) on Wednesday, and National Semiconductor (NSM: news, msgs, alerts) on Thursday.
Barbara C. Costanza is earnings editor of CBS.MarketWatch.com |
