MARKET EARNINGS
Overall 3Q01 Earnings Results
As the 3Q01 reporting season approaches the finish line, the final results continue on track with our post-attack 22% prediction. With 86% now in, and using the actuals for them and the latest estimates for the remaining 14%, the industry analysts expectations stand at a 21.8% decline from 3Q00 earnings.
The earnings for the 86% reported have come in a dismal 0.6% above the estimates for each company at the time it reported (the average over the last eight years has been 3.0%). If that pattern holds for the reports from the remaining 14%, the final number for the 3Q01 earnings decline would be 21.6%.
Most of those left to report are companies with an October ending quarter, so they will include a month of an even slower economy. Many are retailers, including Wal-Mart and Home Depot that report next week. There are also a few major tech companies such as Cisco this week and Hewlett, Dell, and Applied Materials next week.
3Q01 Earnings Results by Sector
The four sectors with the biggest earnings declines in 3Q01 were transportation, technology, and consumer cyclicals.
Transportation, down 118%, by far due to the airlines, was the worst performer. Next came technology at down 72% with communications equipment the worst, semiconductors very bad, and computers bad, but software not so bad. Third was basic materials, down 40% with all three parts, papers, metals, and chemicals, hit hard. The fourth worst was consumer cyclicals, down 26% despite homebuilders continuing to surprise on the upside.
Only three sectors had positive comparisons. The utility sector was up 19%, well above its norm. It was business as usual at healthcare, with a 16% gain. Consumer staples eked out a 1% gain, but well below its normal growth. These three are the traditional defensive sectors in an economic downturn. However, earnings for the consumer staples sector have underperformed since late 1997.
Relative to expectations at the beginning of the 3Q01 on 1 July, the sectors that fell the most were transportation, technology, and consumer cyclicals. The expected earnings decline for transportation fell from 24% to 118%, a drop of 94 percentage points. Technology expectations fell 29 percentage points, from a 49% decline to one of 72%. Consumer cyclical earnings expectations also fell 29 percentage points, from a 3% gain to a 26% decline.
The only sectors that came in above the beginning of the quarter expectations were healthcare, which rose from 11% to 16%, and utilities, which rose from 16% to 19%.
Relative to the final estimates at the time of reporting, the only substantive upside surprises were in the basic materials, utility, and consumer staple sectors. They came in 16%, 5%, and 6%, respectively, above the estimates at the time of reporting. The big disappointments were in the financial, communications services, and technology sectors. They were down 4%, down 3%, and flat, respectively, relative to the final estimates.
Earnings Warnings Bombardment Continues
The recent trends in earnings warnings and estimate revisions continued last week. There seems to be an air of inevitability that these trends will continue for at least the rest of this quarter.
There is still no sign of a deceleration in the rate of warnings. Through last Friday, there were 338 warnings on 4Q01 earnings. Compared to warnings for each of the first three quarters of this year at the equivalent time in each quarter, the 338 4Q01 warnings are 19% ahead of the 284 for 2Q01, 27% ahead of the 267 for 3Q01, and 84% ahead of the 184 for the record setting 1Q01.
This feverish pace of warnings may not lead to a new record, but it is clear that there is NO SIGN OF A DECELERATION IN THE PACE OF EARNINGS WARNINGS! That implies that analysts will continue to slash estimates for 4Q01 and 1Q02 and probably 2Q02 as well.
Investors better keep their hard hats handy. Even though the big weeks of the 3Q01 reporting season are behind us, the barrage of incoming bad news on the earnings front will still continue to be significant.
4Q01 Earnings Outlook
Although the pace of downward revisions on 4Q01 slowed last week, it was only seasonal. The 0.8 percentage point drop from a 15.5% decline to a 16.3% decline was less than the 1.6 percentage point drop of the prior week. It was, however, well above normal. If last week's of 0.8 percentage points a week holds for the 11 weeks until the 4Q01 reporting season starts in earnest, it would mean the currently expected 16.3% decline would fall to a 25.1% decline by the eve of the reporting season. If the actual results come in the usual 3% above final expectations, that would imply 4Q01 earnings would be down about 22%.
The actual pace of downward revisions may rise slightly next week and the week after as most of the companies with an October ending quarter report. The downward revision pace will slow significantly the last three weeks of December, but will rise well above a pace of 0.8 percentage points a week in January as the warnings pore in over the transom.
Again, we emphasize that a 22% decline in 4Q01 does not mean 4Q01 earnings are no worse than those of 3Q01. The biggest factor is that 4Q01 is comparing to a much weaker year ago quarter than was 3Q01. We estimate that an improvement of 15 percentage points in 4Q01 year-over-year earnings growth over that of 3Q01 would be required just for 4Q01 earnings to stay even with 3Q01 on a seasonally adjusted sequential quarter basis. Throw in a onetime 3 percentage point hit in 3Q01 for the insurance companies, and it is apparent that a 22% decline for 4Q01 earnings would mean 4Q01 earnings would be much worse than the 22% in 3Q01.
1Q02 Earnings Outlook
Last week, the industry analysts cut their 1Q02 earnings expectations from 4.4% to 5.0%. We continue to believe the best that can be expected for the final results would be a 12% decline, but that a deeper decline is much more likely. Our guestimate at this time is a decline of about 17%. Although the year-over-year earnings decline in 1Q02 will not be as deep as that for 4Q01, the improvement will not be enough to push 1Q02 earnings above those for 4Q01 on a seasonally adjusted basis.
CY02 Earnings Outlook
The most encouraging sign is that analysts are cutting estimates for further out quarters than they had been before. Estimates for 1Q02 and 2Q02 are in free fall, but there is little movement on 3Q02 estimates. Although the pessimism has increased, it has not yet reached the over pessimism and capitulation that typically occurs before a turnaround in earnings or in the market.
We continue to believe that analyst and strategist estimates for CY02 are too high and expect meaningful downward revisions, particularly this month and in January.
www1.firstcall.com|market |
