MARKET EARNINGS
Overall 3Q01 Earnings Results
The 3Q01 reporting season is limping to the finish line. Most of the October ending quarter companies report this week and next.
For the 91% that have reported, earnings are down 20.7%, but the decline will widen this week as several major tech companies report huge earnings declines. Earnings for Dell are expected to be down 40%, with declines of 81% expected for Hewlett and 95% for Applied Materials. is expected to be down 81%. The declines for the retailers will not be as bad, but they won't be good enough to offset all of the drag from technology.
The expectations based on actual results for the 91% and estimates for the rest works out to 21.8%, but since the remaining companies will probably in the aggregate beat the estimates, the final results will likely be a decline of 21.6% or 21.7%.
Even though the reporting season for October companies has much less companies reporting than the one for September, there likely will be enough bad news to get the market's attention.
Outlook for Oil Prices
The buzz that this week's OPEC meeting may result in production cutbacks puts oil back in the spotlight. The last thing the fragile world economy needs is higher energy prices.
For each of the eight quarters starting with 3Q99 and prior to 3Q01, the energy sector was the leader in year-over-year earnings growth. In 1999 and well into 2000, energy prices and earnings were recovering from the economic downturn in many of the developing countries. Adding to this was OPEC's ability to set production quotas, not only within their membership, but in agreement with non-members, as well as their ability to minimize the usual cheating by the producers.
As a result, the average quarterly spot prices for West Texas Intermediate went from 12.96 in 4Q98 to 28.81 in 1Q00 and to a peak of 31.96 in 4Q00. That sharp rise in price caused energy earnings to surge. Since then the price has been declining, with an average price of 28.73 in 1Q01, 28.05 in 2Q01, and 26.64 in 3Q01, followed by an estimated 24.11 for 4Q01, 23.94 for 1Q02, 22.75 for 2Q02. As a result, earnings for the energy sector earnings is on e of the big drags on overall S&P500 earnings. An upturn in oil prices is not expected to start until 3Q02, with a slight rise 23.17.
If OPEC and the other producers come to agreement this week to cut back production as early as 1 Dec, as rumored, that could change some of those low expectations. That may help 2002 energy earnings, but it could put further pressure on the major economies.
Earnings Warnings Bombardment Continues
The beat goes on for earnings warnings and estimate revisions. There still seems to be an air of inevitability that these trends will continue for at least the rest of this quarter, although continuation of the record setting pace may not be apparent because of the usual seasonal slowing. The real question is how bad the bombardment will be during the peak pre-announcement weeks in early January. Let'a hope the carpet bombing is confined to Afganistan.
So far, there are no signs of a deceleration in the seasonally adjusted rate of warnings. Now that the reporting season is almost over, the usual seasonal slowing has set in. Last week there were only 24 warnings on 4Q01 earnings. That brought the total for the six weeks since 1 Oct to 362.
Although the pace of warnings is experiencing a seasonal slowing, the pace of warnings continues to run well ahead of record levels. Compared to warnings for each of the first three quarters of this year at the equivalent time in each quarter, the 362 4Q01 warnings are 15% ahead of the 315 for 2Q01, 23% ahead of the 294 for 3Q01, and 53% ahead of the 236 for the record setting 1Q01.
Compared to the year ago quarter, the 362 warnings for 4Q01 is almost double the 191 recorded by the same date in 4Q00. The final warnings total for 4Q00 had broken by a good margin the record set in 4Q98, although that 4Q00 record was quickly broken in 1Q01.
This feverish pace of warnings may not lead to a new record, but it is clear that there continues to be NO SIGN OF A DECELERATION IN THE PACE OF EARNINGS WARNINGS!
That implies that analysts will continue to slash estimates for 4Q01 and 1Q02 and probably 2Q02 as well, but with the usual seasonal slowing in revisions until the seasonal reacceleration for 4Q01 warnings occurs in the mid December and early January confession season.
October Retail Sales Disappointing
The good news on the October sales reports from the retailers was that same store sales came in somewhat above expectations. The First Call retail index consists of 33 companies. Same store sales for the group came in at 2.0%, slightly above the retail analysts' 0.6% forecast. Much of the year-over-year gain was due to Wal-Mart, the biggest component in the index. Wal-Mart earnings were up 6.7%, ahead of the 5.5% expected. Excluding Wal-Mart, October same store sales were down a modest 0.4%, only slightly ahead of the forecasted 0.6% decline for the other 32 companies.
Led by Wal-Mart, the 7 discounters same store sales were up 5.3%, but their department store cousins continue to do less well with a 5.2% decline. The 14 apparel retailers did even worse with a 6.3% decline.
Not only was the same store data bad enough, but it is even worse considering that most stores were offering huge promotional discounts to get shoppers back into the stores. That means sales could drop off if the promotions revert back to more normal ones, or if the promotions are continued, it could mean an even deeper decline in earnings than currently expected. Either way, it looks like the grinch is in the drivers seat for the holiday selling season.
From the eve of the 911 attack to last Friday, retail analysts have slashed earnings estimates for as far out as 2Q02. As measured by the 136 company First Call retailer index, the 3Q01 earnings expectations went from a 6.6% year-over-year gain to a 6.5% decline. The expected gain for 4Q01 earnings was slashed from 22.3% to 10.4%, while for 1Q02 the expected gain was cut from 19.3% to 11.1%. Even the 2Q02 estimates got a greater than normal haircut, with the expected earnings gain trimmed from 21.7% to 16.0%. The cuts have not yet extended out to 3Q02, but the analysts are currently expecting a 25.2% gain.
In a related area where monthly data was also reported last week, the hotel RevPar (revenues per available room) preliminary October data as compiled by Smith Travel indicated a 16% to 18% decline for last month. That does represent a rebound from September, when occupancy fell sharply following the 911 attack, but it also indicates business will likely be soft for some time to come.
Another related area with monthly data reported last week was the homebuilders. Indications are that homebuilding may be entering into the long awaited and frequently postponed slowdown despite the lower mortgage rates.
Earnings Outlook for Coming Quarters
The downward revisions in 4Q01, as well as in 1Q02 and 2Q02, earnings estimates slowed last week, but it was only seasonal. The expected decline for 4Q01 S&P500 earnings only fell from 16.4% to 16.7%, but the expected decline for 1Q02 did drop from 5.0% to 5.9%, and the gain expected for 2Q02 slid from 9.8% to 9.3%.
The warnings and downward revisions beat goes on; it just may be somewhat muffled until January.
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