Many U.S. Firms Fear SARS
Will Hurt Profits This Quarter
By CRAIG KARMIN
Staff Reporter of THE WALL STREET JOURNAL
More American companies have started to worry that the effects of SARS may be spreading to their bottom lines.
Companies as diverse as insurer American International Group Inc., fast-food retailer Yum Brands Inc., and aircraft-equipment maker Goodrich Corp. recently have pointed to severe acute respiratory syndrome as an area of concern when reporting first-quarter results.
And as the outbreak has continued to spread in recent weeks, corporate officials are bracing for worse news ahead. "SARS had a minimal impact in the first quarter," says Anthony Sanzio, spokesman for Eastman Kodak Co. "We expect a bigger impact in the second quarter."
The most pronounced threat to U.S. companies is the spread of SARS in China, where the virus appears least under control. That market and Hong Kong together accounted for nearly a quarter of the income last year of U.S. overseas subsidiaries, according to the Bureau of Economic Analysis. That's more than the subsidiary income from France, Germany and Italy combined.
BATTLING SARS
• For full coverage, see SARS: Containing the Outbreak1.
• See the latest toll2 from the deadly SARS virus by country.
• See a breakdown3 of travel restrictions sparked by SARS.
• See an infographic4 on other recent health scares.
Whether the economic fallout from SARS will prove to be a blip or a recurring problem for U.S. companies is unclear. The World Health Organization has lifted travel advisories for Toronto and Vietnam, and the U.S. did so for Singapore on Tuesday; plus, there are signs that the situation is improving in Hong Kong. All of which raises hopes that the virus's ability to spread may have peaked.
Moreover, most manufacturing centers set up by U.S. companies haven't yet been hit that badly. "Nobody has reported an outbreak in a factory, and we anticipate minimal impact on second-quarter earnings," says Virginia Genereux, a footwear and apparel industry analyst at Merrill Lynch.
Even if SARS doesn't shut down factories in Asia, it still could end up hurting business. Joseph Quinlan, global economist with the Center for Trans-Atlantic Relations at Johns Hopkins University, says many U.S. firms see China more as a customer base than as a center of production. With economists downgrading China's second-quarter economic growth to negative 1% or 2% from a forecast of a positive 8% before SARS, Chinese consumption of U.S. goods and services is sure to contract. "As SARS decimates growth and demand in China, the effect on U.S. earnings will be significant," Mr. Quinlan says.
That could mark a reversal from the first quarter, when U.S. corporate earnings widely exceeded expectations. If SARS continues to pressure Asian currencies against the dollar, it may further hurt U.S. sales in the region, because the cost of American goods would go up. This, in part, would undermine the benefits of a weakened dollar in Europe.
Candidates for reduced earnings include restaurant chains. But the threat isn't so much to an international fast-food chain like McDonald's Corp. as it is to Yum Brands, the parent of KFC, Pizza Hut and Taco Bell, which derives 13% of its profit from Asia. The company already has warned that if the outbreak were to hit all of China for two to three months, its sales in China would decline by about 20%, and Yum's year-end earnings per share could fall three to four cents. Since mid-March, when the WHO declared SARS a global health threat, Yum's share price is up 9%, about the same gain as the Dow Jones Industrial Average over that period.
Some companies already are feeling the pain. Mobile-phone and semiconductor maker Motorola Inc., which is closing a Beijing office building for one week after discovering a staff member with SARS, anticipates that the disease could reduce cellphone sales in China and other parts of Asia.
Microchip Technology Inc., another semiconductor manufacturer, met its fiscal fourth-quarter profit projection only after lowering that forecast. Officials said SARS, which is delaying business purchasing decisions by Asian customers, was a major reason why. "Certainly those difficulties are still with us today," Gordon Parnell, chief financial officer, said during an April conference call.
Kodak, meanwhile, anticipates slack second-quarter demand for film in China -- its second-biggest market behind the U.S. -- because SARS has limited travel to and from the country.
Heavy-machinery firms may also be vulnerable. UBS Warburg recently downgraded Caterpillar Inc. to a neutral rating from a buy. "SARS poses a risk to the growth of the Asian economies, which have been a major growth driver for Caterpillar," analyst David Bleustein wrote.
Financial-services firms that rely on personal visits to drum up business are suffering, too. AIG, which received 28% of its 2002 revenue from Asia, said that SARS will damp new sales in parts of Asia in the second quarter and will have a "slight impact" on profitability. "The problem is it's very difficult for agents right now, in Hong Kong and southern China, to make calls on clients," AIG Chairman Maurice "Hank" Greenberg said on a conference call. "There are concerns about meeting face to face."
Even so, a few companies think the worst may be over. Goodrich, which sells aircraft components and blamed SARS for a decline in March orders, says the drop in air traffic appears to be stabilizing. Company officials are optimistic that SARS will have less of an impact in the second half of the year.
Chuck Hill, director of research at Thomson First Call says some companies may try to use the outbreak as an excuse for weakened profits, just as some did after the Sept. 11 attacks. "How valid it will be remains to be seen," he says.
Write to Craig Karmin at craig.karmin@wsj.com5 |
