IT'S FUNDAMENTAL: POOR PROFITS WILL DRIVE DOWN STOCKS
By JOHN CRUDELE
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FIRST-quarter corporate profits are shaping up to be the most disappointing since 1991.
The bubble makers on Wall Street may not care but the 500 companies that make up the Standard & Poor's index will report profits that are only 1.4 percent higher than a year earlier. Wall Street isn't going to be too happy with that. It had been expecting earnings to rise 9.6 percent.
Forecasts have been coming down steadily as more companies give heads-ups about problems ahead. But the decline didn't come early in the quarter, as often happens, so Wall Street probably hasn't had time to adjust.
"It all really started in the past week and a half," says Joe Abbott, U.S. research manager for IBES, the company that tracks earnings forecasts.
The actual increase in earnings sometimes isn't nearly as important as are the profits in relationship to expectations. But this time around the profit reports - which should start coming out the third week of April - could be dangerous, both because they are so poor and Wall Street had such high hopes.
Abbott said profit estimates have fallen 5.5 percent points in just the past two months. "That's the steepest decline since 1991, says Abbott.
According to IBES, 64 companies out of the 500 have already issued profit warnings. And only five have said there might be a pleasant surprise.
Usually the warnings come from around 40 of the 500. And there are usually more alerts of better profits.
There is something even scarier.
Companies that have been issuing profit warnings are not doing so because the problems in Asia are hurting their bottom lines. IBES says the earnings shortfalls are mostly due to home-grown problems.
And that means the Asian problem may still be in front of us. So if, say, companies start seeing their sales in Asia suddenly drop off in the second or third quarter, profits for those periods may not rise very much. And with the U.S. currently running an ever-growing trade deficit because Asian customers don't have the money to keep buying our goods, it is almost certain that corporations will feel the Far East pinch.
The current earnings disappointments and the ones related to Asia that are certain to come are occurring at a very inopportune time for people who believe that fundamental factors like earnings still rule the market.
The price-to-earnings ratio of the S&P 500 currently stands at a record 24.69-to-1 for the quarter and 27.64-to-1 when calculated based on earnings reported over the last 12 months.
The quarterly number is an even more scary 26.93-to-1 when you reduce corporate earnings by one-time writeoffs that the S&P 500 firms have taken. Many pros think these writeoffs should be included in the closely-watched market indicator.
The price-to-earnings ratio will get even more unnerving when the disappointing first-quarter profits are officially reported.
Right now, the biggest earnings alerts are coming from shipbuilding, railroads, semiconductors, communications and computers.
Will the stock market react to the poor profits? It didn't react much to the warnings that have already come out. But eventually stocks will pay attention to fundamentals.
Sprint looks like the next takeover candidate in the communications industry, but it may not happen soon.
There were rumors last week that British Telecom might be interested in Sprint. But a Wall Street source says serious talks are not underway between Sprint and BT, although "everyone is talking to everyone."
The source agrees that Sprint would make a fine takeover candidate. |
