Investors Fleeing Hidden Hazards
Tuesday January 29, 12:18 pm Eastern Time
SmartMoney.com - Market Analysis
By Igor Greenwald
WHAT YOU DON'T KNOW can too hurt you.
Stocks sank to new lows for the year Tuesday as investors worried about potential icebergs lurking beneath glossy corporate balance sheets in the wake of Enron's bankruptcy.
At 12:40 p.m. ET, the Dow was off 160.34 points to 9705.41, while the Nasdaq surrendered 39.75 to 1904.16. The S&P 500 slid 20.59 to 1112.47. Industrials, financials, telecoms and energy producers were especially hard hit. Gold miners and drug makers provided some safe havens.
The market shrugged off the latest signs of an economic rebound as the Conference Board's consumer confidence index rose to a four-month high of 97.3 from December's revised 94.6. Durable-goods orders perked up as well, rising 2% in December after dropping 6% a month earlier.
On the flip side, confidence in corporate leadership took another turn for the worse after embattled conglomerate Tyco International (NYSE:TYC - news) acknowledged paying $20 million to one of its directors and an affiliated charity for helping it land a major acquisition. Business ethics experts questioned the payment, fueling a controversy Tyco didn't need. The stock has been badly hurt by accounting jitters that may have led Tyco to announce an unpopular breakup initiative. Tyco shares plunged another 17%, extending a rout that has lopped off nearly $50 billion from the company's market cap since the start of the year.
It was a very bad day for acquisitive conglomerates with complicated books and a history of accounting investigations. Another big company that fits this bill, Cendant (NYSE:CD - news), tumbled 13% strictly on rumors of more accounting problems.
It was also a bad day to delay an earnings report to ``study'' liabilities stemming from past spinoffs of loss-making telecom subsidiaries, as energy trader Williams Cos. (NYSE:WMB - news) discovered after its stock took a 24% hit. Investors fretted about ``triggers'' that could force Williams to dilute its equity base in response to credit-rating changes or share-price drops of its former subsidiary Williams Communications (NYSE:WCG - news). Similar triggers forced former Williams competitor Enron (Other:ENRNQ) into bankruptcy last month.
The Williams announcement came a day after long-haul telecom provider Global Crossing (NYSE:GX - news) unveiled the fourth-largest bankruptcy in business history, but only the third-largest in the past two months behind Enron and ailing discounter Kmart (NYSE:KM - news). Another telecom provider, WorldCom (NASDAQ:WCOM - news), plunged 15% Tuesday on rumors of a possible credit downgrade. Banking giant J.P. Morgan Chase (NYSE:JPM - news), a major lender to Enron and Global Crossing, among other failures, dragged down the blue chips, falling 5%.
Fellow blue-chip financials Citigroup (NYSE:C - news) and American Express (NYSE:AXP - news) weren't far behind in the loss column. The latter disappointed investors a day earlier as it wrapped up a miserable year made worse by unanticipated losses on high-yield junk bonds. Citigroup shares fell nearly 4%, while AmEx shed more than 4%.
Corporate titans General Electric (NYSE:GE - news) and IBM (NYSE:IBM - news), which have in the past been targeted by skeptics claiming they use complicated accounting to puff up results, were also weak. IBM wasn't helped by Samuel Palmisano's long expected ascent to the chief executive post in place of his mentor Louis Gerstner. GE's stock fell 5%, while IBM's lost 4%.
The Dow's losses would have been worse if not for drug giant Merck (NYSE:MRK - news), which gained 2% after unveiling plans to spin off its pharmacy-benefits management unit in an initial public offering due by the middle of the year. The unit, which accounts for 55% of Merck's revenue, doesn't fit investors' post-Enron preference for simpler balance sheets and value propositions. In making the announcement, Merck reiterated its warning last month of stagnant profits in 2002 followed by an upturn next year. That pledge assumes the drug maker can overcome the hit it's taking from the expirations of patents on lucrative medicines.
The good news for investors in Texas Instruments (NYSE:TXN - news) is that the leading maker of microchips for mobile phones plans to return to profitability sooner than expected after posting a surprisingly narrow fourth-quarter loss that should buoy the chip sector and techs in general.
The stock surged 5% after the company beat the Street by three cents with a fourth-quarter loss of six cents a share. That's about the deficit analysts had expected in three months' time, when Texas Instruments now expects to break even on a pro-forma basis. The company is making deeper cuts in capital spending to reach its new goal.
The bad news is that TI supplies its products to an industry whose long-term growth prospects have dimmed considerably since the capital markets ploughed all those untold billions into frequency licenses and relay towers.
The latest static hiss for wireless investors comes courtesy of third-largest provider AT&T Wireless (NYSE:AWE - news), which added 927,000 subscribers in the fourth quarter, near the low end of its forecast range. Revenues grew 19% in a year's time, but average revenue per user fell as the industry lowered rates in a struggle over the customers needed to justify past investments. The bottom line wasn't pretty either. AT&T Wireless posted a pro-forma loss of 14 cents a share, eight cents worse than the consensus estimate. Net loss came to $1.2 billion, or 48 cents a share. But the firm did a better job of holding on to its customers and outperformed both struggling industry peers and low expectations, noted analysts, enabling the stock to move fractionally higher.
Texas Instruments and AT&T Wireless exemplify the larger dilemma facing investors, who must weigh evidence of incremental improvement in corporate earnings against a paucity of real profits and doubts about the pace of long-term growth. Tuesday's crop of disappointments included another telecom, Western Wireless (NASDAQ:WWCA - news), which plummeted 19% on worries about a sharp decline in roaming charges, and local telephony giant Qwest Communications (NYSE:Q - news), whose stock dropped 6% after the company finished a year to forget with yet another earnings miss.
Long-term growth is also an issue for Coca-Cola (NYSE:KO - news), the top drinks maker that met estimates with fourth-quarter profits of 37 cents a share. The company reiterated its goal of boosting 2002 earnings by 11% to 12%, but said currency effects could trim the bottom line by up to a dime a share, in what amounted to a profit warning relative to Wall Street's expectations. North American case volumes grew a disappointing 2%. The stock fizzled, sinking 1%.
Another blue chip, the struggling aerospace conglomerate Honeywell International (NYSE:HON - news), also matched estimates with fourth-quarter pro-forma earnings of 55 cents a share. It then forecast a first-quarter profit below the consensus estimate while pledging to deliver full-year earnings above analysts' expectations. The stock fell 3%.
And while Honeywell has struggled with the airline industry's woes in the wake of the terror attacks, it can take heart in the better news coming from online travel agency Expedia (NASDAQ:EXPE - news). Its stock rose 7% after the company posted its first quarterly profit thanks to strong vacation bookings. Net earnings amounted to eight cents a share, and the pro-forma profit of 31 cents a share left the Street's dime-a-share consensus forecast in the dust.
The sell-off comes on the eve of President Bush's first State of the Union address and the day before Wednesday's conclusion of the annual two-day meeting by Federal Reserve policy makers. After 11 interest-rate cuts last year aimed at propping up the sagging economy, the Fed is widely expected to leave its benchmarks unchanged in anticipation of a recovery this year.
Bond prices rebounded, sending yields lower. The yield on the 10-year Treasury note fell to 5.02% from 5.07% late Monday, while the two-year note yielded 3.07%, down from 3.16% a day earlier. |
