December 12, 1997
Heard on the Street
Firms Link Shock to Asian
Ills;
Analysts Blame Other Factors
By SUZANNE MCGEE
Staff Reporter of THE WALL STREET JOURNAL
Are all the stock-market shocks out there really Asia's
fault?
As investors and analysts continue to comb through
disappointing earnings releases from Oracle and a host of
other companies, they are starting to worry that corporate
executives might be able to camouflage fundamental
demand or profitability weakness by blaming the fallout
from Southeast Asia's economic woes.
"Every company out there that has an earnings issue is going
to be tempted to blame it on the most obvious problem that's
already in sight, and that's what's happening in Asia," said
Scott Pape, a portfolio manager with Loomis Sayles in
Chicago. "It's just like retailers blaming the weather first of
all when they have bad sales."
Placing the Blame
In the past two days alone, Asia has been cited for its
negative impact on results by System Software Associates,
semiconductor assembly-equipment maker Kullicke &
Soffa Industries, Microsoft, disk-drive maker Quantum,
chemicals and machinery producer FMC and conglomerate
AlliedSignal.
Oracle's failure to meet analysts'
expectations in the most recent
quarter has unleashed a new bout of
selling in technology stocks and
resurrected the specter of the "Asian
flu," thanks largely to prominent
mention given in the company's own
news release to the region's recent troubles. "The economic
situation in Asia-Pacific clearly had a significant impact,"
said Jeffrey Henley, chief financial officer of Oracle, in the
release.
But that's not the whole story, analysts and investors say.
Oracle is grappling with demand issues in its core businesses
at home, as well as dealing with currency problems overseas.
Possible Exaggeration
"It looks like they're raising the 'Asian shield' here to take
shelter behind," said Erik Gustafson, a portfolio manager at
Stein Roe & Farnham. "I expect to see a lot more companies
with short-term earnings problems, however caused, find it
awfully convenient to do the same. You'll have a great deal
more companies that will see some impact on earnings from
Asia, but they won't be as great as some of them or as the
market might lead you to believe."
Indeed, investors are already scrutinizing the collapse of the
$800 million sale by Corning of the controlling stake in its
housewares business to AEA Investors, announced late
Wednesday, and attributed by Corning officials to the
deteriorating growth prospects for housewares in the Asian
market. Some analysts believe the deal was already in
trouble, that the price was too high, and that Asia offered
both parties a face-saving pretext for walking away.
Charles Clough, U.S. market strategist at Merrill Lynch,
compares the Asian upheavals with the imposition of a 10%
tax surcharge imposed in 1968 by then-President Lyndon B.
Johnson to help cover the cost of the Vietnam War.
"All of a sudden, when companies began to disappoint on
the earnings front the next year, the tax surcharge got the
blame over and over again," he said. "What really
happened, of course, was that the economic cycle had
peaked, and we were starting to roll over into the recession
of the 1970s. The tax issue was a very convenient way of
explaining away problems that had another genesis."
'Unsustainable' Pace
Mr. Clough said it is logical that technology companies are
the first to disappoint, and quick to blame the woes on Asian
demand. "Spending on capital goods like technology
products has been growing three times as fast as the
economy, and that's unsustainable," he said. "When you
create a lot of excess productive capacity, it's only
reasonable to expect to see pricing weaken as fast as it is."
Oracle isn't the only stock to take a market beating after
citing slackening Asian demand in reporting
less-than-expected earnings. Systems Software stock fell
37% after it cited "disappointing" Asian purchases as its
earnings fell short of analysts' expectations in its fourth
quarter, ended Oct. 31.
"In technology stocks, broadly, there's a need to fine-comb
the results to see if there are deeper issues than just what's
happening in the Asia-Pacific region," argued Melissa
Eisenstat, an analyst with CIBC Oppenheimer. "That was
definitely the case with Oracle: The part of their business
that is growing is also the part of the business where they
have to compete with Microsoft, so life is going to be a little
bit more difficult."
Mr. Clough expects pricing problems to spread beyond
high-tech to other parts of the economy, and to crop up in
earnings statements from companies in other sectors over
the coming months. Technology companies like Oracle, he
adds, serve as an early-warning indicator because they are
the fastest-growing part of the economy, and one where
even modest slowdowns in sales can show up quickly in
squeezed profit margins.
Investors and analysts who have begun to mull the
"scapegoating" issue say they plan to question company
managements very closely on the exact causes of earnings
disappointments. They also say they will keep an eagle eye
on the domestic operations of companies with big
international operations, such as Coca-Cola, Proctor &
Gamble and Gillette, for signs of declining profits that might
be swept up behind the "Asia shield."
High-end retailers like Saks or Tiffany's, they fret, might
blame a sales falloff on less spending by well-heeled Asian
consumers. Airlines might try to blame a drop in travel on a
decline in business on their Asian routes. Federal Express,
which reported earnings after the market closed Thursday,
didn't mention Asia, as some had expected it might.
"Whenever you get a headline event, it offers an umbrella to
keep a lot of problems out of the rain," said Byron Wien,
market strategist at Morgan Stanley, Dean Witter, Discover.
"A company running into a variety of problems can easily
succumb to the temptation of saying, 'well, you couldn't
have expected us to hit the estimates; after all, you do read
the papers and know that there's something bad going on in
Asia.' "
Figuring out how much of an earnings shortfall is due to
Asian troubles can be tricky. Among the variables are the
mix of products and profit margins for sales in the region,
and whether lower sales should be attributed to currency
fluctuations or a plunge in demand as growth rates shrivel.
"How do you get a handle on this? That's the question we're
grappling with, and it's very, very difficult and frustrating,"
said Tim Morris, chief investment officer at Bessemer Trust
in New York. "This is an enormously fluid situation for the
next few weeks, and more than anything, investors hate
uncertainty."
The picture should become clearer as the months unfold and
the magnitude of the economic setbacks in Asia crystallize.
"Eventually, we'll be able to get a better handle on what's
real, and what's another Asian excuse," said Mr. Pape of
Loomis Sayles. |
