more of the sameÿ predicting a lowering of coke growth.
however coke realized .16 cents per share from sale of bottlers this year.ÿ thus operating earnings, not including profit from bottler sales, will grow from approx 1.54 (1.70, current 1997 estimate, less .16) in 1997 to about 1.75 in 1998, a 14% increase. and there is still east central europe, china, india and the middle east for future growth.ÿ regards.
"The point of today's brief is simple: Coke and Oracle are not the only companies that will be affected by a stronger dollar and a weaker Asian economy. As this becomes apparent, additional stocks will be hammered as Oracle was on Tuesday, and concerns could spread to the overall market.
Coke
The case of Coke is particularly interesting. Remember that it was Coke's earnings warning that started the decline in the Dow from over 8200 in early August. In fact, third quarter earnings came in at just $0.41 a share, up from $0.39 in the year ago period, a modest 5% gain. Apparently, the earnings machine was already winding down to some extent.
After taking a beating to under 54, however, the share price rebounded sharply to about 66 in recent weeks as confidence returned to the overall market. Consensus estimates showed that Coke was still expected to grow earnings 15% to 18% in the years ahead despite the evidence of a current slowdown. Those expectations may need to change. Years of strong earnings growth for Coke and other companies may have led to unrealistic expectations that earnings will always rise at 15% or more. Already, 1998 estimates are starting to be pared to about 8%, in part because of the strong dollar, but also because underlying growth has slowed as well.
Most importantly, Coke is not the only company that is affected by a stronger dollar, or perhaps even by an underlying earnings slowdown. It is just the first stock price to be hit by these concerns.
Asian Problems are Real
When the Asian crisis hit, the Dow tanked from 7700 to 7200. The idea was that weaker Asian economies would lead to lower profits for U.S. companies. It was a sound idea, but quickly forgotten. Within a couple of weeks, the Dow not only fully recovered but was heading back to the old highs over 8200. This was in part helped by a reasonable conclusion that the weak Asian economies would keep U.S. inflation (and thus interest rates) down. But the earnings problem should not have been so quickly dismissed.
Oracle was a stark reminder of this. Asian revenues were well below expectations. Asian revenues don't have to add up to a large percentage for weakness in that area to cause lower than expected earnings for a company. After the Asian turmoil hit, there was a desire to say, "well, Asia may not grow 7%, but it will still grow 3%." Maybe true, but that also means the profit gains in Asia may not be there, and will hold down overall profit growth for many companies. Oracle reported an overall increase in profits, yet the stock lost 30% in one day.
Warning Signals
The factors that hit Coke and Oracle will not be "company specific." The dollar has strengthened, and many multinationals will feel the impact. Demand in Asia has weakened, and many companies will feel that impact as well. So far, the market has handled these circumstances remarkably well, especially considering the rally that has occurred since the Asian turmoil hit (the Dow is still up over 4% since then). Over the next several weeks, there is increased risk that a similar impact on earnings will be apparent for many more companies. Briefing's sentiment readings remain at neutral, not bearish, but the warning signals from Coke and Oracle can not be ignored.
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