1st Call's Chuck Hill, 7/22/02...
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>>>THIS WEEK IN EARNINGS: JULY 22 - 26, 2002
MARKET EARNINGS
The story in the 2Q02 reporting season is not the 2Q02 results. As we said last week, "Do not worry about the 2Q02 earnings, and do not focus on them. They will be okay but they are not the issue".
The issue is the comments about 3Q02 and/or 2H02 that have resulted in pre-announcements turning more negative. This growing realization that 3Q02 and 4Q02 earnings estimates are likely to be cut significantly had a lot to do with spooking the market last week.
Expected 2Q02 Earnings
The 2Q02 earnings reporting season is unfolding as expected with three minor exceptions, two of which were adjustments rather than negative earnings surprises. Earnings for the S&P500, as expected will be, up slightly from those of 2Q01. The final results are likely to be up about 1%.
The minor deviations from expectations have been the change in the S&P500 components, an adjustment to the year ago earnings number for Microsoft, and the unexpected earnings hit at FleetBoston. The total impact was two percentage points.
The seven company switch in the Americanization of the S&P500 pulled the 2Q02 earnings growth down by about 0.9 percentage points. Replacement of what had been an estimated earnings number for 2Q01 at Microsoft with the one just released by Microsoft accounted for an additional 0.3. The unanticipated special charges that FleetBoston took for Argentina and Brazil, and for general incremental credit provisions took another 0.8 off the growth rate (the analysts had anticipated the charge for divesting Robertson Stephens but not the aforementioned).
Relative to expectations, the earnings for the 44% of the S&P500 companies that have reported have come in 0.9% above the total of the final expectations for those 44%. If it had not been for the surprise charges at FleetBoston, this number would have been close to the 2.8% average over the last eight years. Barring another major surprise like that at FleetBoston, we would expect the final surprise factor to be close to the 2.8% average.
The 2Q02 earnings for the 44% that have reported were up 10.5% over those of 2Q01. That number will come down this week and next as the oil companies report, along with communications services and utilities. These three sectors are all expected to have down earnings from the year ago quarter. So far most of the companies reporting 2Q02 earnings have been in sectors expected to have up earnings. As the reporting emphasis shifts to other sectors, the 10.5% will drop probably to about a 1% gain.
The bright spot in earnings continues to be the consumer cyclicals sector. With over one-half of the sector having reported (most retailers being the notable exception), consumer cyclicals earnings are beating expectations by 8%. The big contributors to the wurprise were Ford at 90 million above expectations, GM at 63 million above, and Sears 55 million above. Using the actual earnings for those that have reported and the estimates for the remainder, earnings for the sector are expected to be up 40% over those of 2Q01. That is far above any of the other ten sectors, with the closest being the financial sector with an expected gain of only 10%.
The worst performing sectors on a year over year basis are expected to be
... energy,
... transportation,
... utilities,
... capital goods, and
... communications services.
Earnings for 2Q02 for all of these sectors are expected to show a decline from 2Q01 earnings.
Expectations for 2Q02 Earnings
Unfortunately, even though the 2Q02 earnings reporting season is unfolding pretty much as expected in regard to 2Q02 earnings, it is also unfolding pretty much as expected in the negativity of the accompanying comments about the outlook for the second half of 2002. Too many companies are saying
During the first and second quarters of this year, we were continually stressing that both earnings pre-announcements and revisions to earnings estimates were running not only less negative than last year but even less negative than normal. That scenario appears to be coming to an end.
The earnings pre-announcements are now running more negative at this stage of the quarter than they had been in the two most recent quarters. The ratio of negative pre-announcements to positive pre-announcements for 3Q02 is at 2.3. That reverses a declining trend of the past three quarters. At the equivalent time (the 19th of the first month of the quarter) in 3Q01 it was at 4.4 for 3Q01 pre-announcements. The corresponding ratios in 4Q01 was 2.3, in 1Q02 was 1.6, and in 2Q01 was only 0.9.
Furthermore, in the first three weeks of 3Q02, the 3Q02 earnings growth estimate was reduced from 16.6% to 14.7%, while the 4Q02 estimate was reduced from 27.7% to 26.3%. This is far more than the normal trimming for so early in the quarter. Next week will likely bring further cuts.
Our concern
...has long been that the recovery in capital spending may be much more gradual than investors had been expecting.
... The two most vulnerable sectors on this issue are tech and industrials.
Last Tuesday, the results and comments from Intel and Caterpillar pretty well summed up the situation. Both reported 2Q02 earnings were down from the 2Q01 earnings, but even worse, both come up short of expectations. More damning yet was that both warned on earnings for the second half. These two companies could well serve as examples that the recovery in capital spending may be much more gradual than in recoveries from recent recessions and more gradual than most market watchers had been anticipating. Intel makes a good poster child for the tech sector, while Caterpillar makes a good one for the industrial sector.
Others in those sectors that had comments about not seeing much, if any, seasonally adjusted sequential quarter revenue improvement in the 2H02 were
... Microsoft,
... SAP,
... Siebel Systems,
... Sun Microsystems,
... Apple Computer,
... Advanced Micro Devices,
... Teradyne,
... Nokia,
... Ericsson,
... Nortel, and Gateway in tech, and
... Ingersoll Rand in industrials.
Previously, Cisco Systems, Hewlett-Packard, and Oracle had made similar statements.
Intel had said in early June that it expected only the normal seasonal improvement in revenues in 2H02, but last Tuesday said they now expected it would be less than the normal seasonal pickup.<<< |
