Profit Warnings Becoming More Common
Tuesday September 10, 2:14 pm ET
Reuters Business Report
By Nick Olivari
NEW YORK (Reuters) - An increasing number of companies are warning that
third-quarter earnings are unlikely to meet expectations, reversing a trend that began
in 2001 and disappointing investors who were optimistic the worse was over.
Companies as diverse as casual
apparel retailer American Eagle
Outfitters Inc. (NasdaqNM:AEOS -
News), railroad operator CSX
Corp.(NYSE:CSX - News), and
healthcare company MedImmune
Inc.(NasdaqNM:MEDI - News) have
warned investors in recent days that
they won't meet profit expectations in
the quarter.
Higher earnings bolster stock prices
and while analysts still expect profits
to grow in the quarter, investors are
disappointed that the ratio of
warnings to positive
pre-announcements is rising for the
first time since the fourth quarter of
2001.
And with concerns lingering that the economic recovery may be stalled or delayed as
companies fail to increase capital spending, investors are bracing themselves for
further blows.
"I'm disappointed more than surprised," said Gregg Summerville, a money manager
with Columbus, Indiana-based Kirr, Marbach & Co. which oversees $500 million. "I
would have liked the prior trend to continue, though the economic indicators showed
that things were softening."
Some 765 companies had made preannouncements for the third quarter by Tuesday,
with 401 warning they are unlikely to meet previous guidance, according to
Boston-based research firm Thomson First Call.
The number of warnings is 28 percent more than at the same point in the second
quarter, and on a par with the third quarter of 2001.
Fast-food operator Jack In The Box Inc.(NYSE:JBX - News) on Tuesday halved its
quarterly earnings forecast, citing soft sales, store-closing costs and a labor litigation
settlement.
SLOWING ECONOMY
"We normally see more negative announcements than positive," said Joe Cooper, a
research analyst at Thomson First Call. "As the quarter begins, its 50-50 but the closer
to reporting season the more negative announcements, and we are in that stretch
now."
To Cooper and others, the increase in warnings is a sign that the economy may not be
stabilizing as quickly as had been hoped.
Profit warnings "are an indication the economy has slowed, something the market was
already concerned with," said Joe Stocke, managing director, StoneRidge Investment
Partners LLC. based in Malvern, Pennsylvania, which oversees $750 million in assets.
The diversity of companies issuing warnings indicates the slowdown "is more
broad-based than it once was."
To be sure, there are still 190 companies this quarter which announced they may
exceed expectations and 174 that said they are on target to meet forecasts, including
Dow Jones industrial average component United Technologies (NYSE:UTX - News), and
media group New York Times Co.(NYSE:NYT - News) on Tuesday.
Used car dealer America's Car-Mart Inc.(NasdaqNM:CRMT - News) raised its outlook
for fiscal year 2003 on Tuesday after reporting strong sales and lower credit losses
helped triple fiscal first-quarter net income.
But the warnings are bringing down expectations for profit growth, and investors just
see more revisions ahead.
"Expectations for the second half are still too high, and downward revisions are
discounting a diminished earnings rebound," said Eric Barden, portfolio manager with
First Austin Capital Management Inc. which oversees $50 million.
Third-quarter profits for S&P 500 companies are now expected to grow by 10.9 percent
in the third quarter. That's down from an expected rise of 16.6 percent at the beginning
of the quarter, and almost half the 20.7 percent quarterly earnings growth expected at
the beginning of 2002.
For the year, S&P 500 company aggregate profits are expected to grow by 3.5 percent,
a lower forecast than the 8.8 percent expectation at the beginning of the year.
And as long as those revisions keep going lower, share prices are not likely to see any
sustained rally, anytime soon, investors say.
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