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U.S. 1st-Qtr Profits Exceeding Expectations (Update1)
U.S. 1st-Qtr Profits Exceeding Expectations (Update1) (Updates with comment by analyst Abby
Joseph Cohen in 6th paragraph.)
New York, April 28 (Bloomberg) -- U.S. companies' first- quarter profits rose a
greater-than-expected 8.5 percent, the biggest gain since the end of 1997, because of consumer
demand for everything from cars to cellular telephones to cosmetics.
With about 76 percent of the Standard & Poor's 500 Index companies having reported,
first-quarter earnings are higher than the 6.4 percent analysts forecast. Of the 378 companies
reporting, 66 percent have topped estimates.
International Business Machines Corp., AT&T Corp., Boeing Co., General Motors Corp. and other
industry leaders had earnings growth that was higher than expected, a sign that the eight-year- old
U.S economic expansion isn't over. The gross domestic product, the value of all goods and
services produced in the U.S., is forecast to rise 3.8 percent in the first quarter, according to
Bloomberg analytics. ''Wow. The first quarter has been a real surprise,'' said Edmund Cowart, a
money manager with Banc One Investment Advisors Corp. in Columbus, Ohio, which oversees
$120 billion in assets. ''The concern that a slowdown in the economy would crimp profits sure
seems overblown.''
The results are a reversal of 1998's first quarter, when profits slid 1.6 percent. A key reason for the
surge is that 1999 has been free of the economic turmoil that wreaked havoc on earnings last
year, when Russia devalued its currency and defaulted on some debt, Long-Term Capital
Management LP almost collapsed and GM workers went on strike. ''The corporate profit data
have been absolutely stunning,'' said Goldman, Sachs & Co. investment strategist Abby Joseph
Cohen said at a conference in Washington.
Thanks to Consumers
So far, sluggishness in some Latin American countries and the war in Kosovo hasn't damped U.S
consumer enthusiasm for spending. ''The consumer is really driving the economy,'' said Timothy
Ghriskey, senior portfolio manager at Dreyfus Corp. Of 79 retailers that have so far reported
earnings in the first- quarter, for instance, 73 beat estimates, according to First Call Corp.
Consumer spending is forecast to rise about 8 percent in the quarter, according to Bloomberg
analytics, the highest in 11 years.
There have been some notable exceptions to the profit surge: Caterpillar Inc. and Coca-Cola Co.,
for example, each reported slack results in the quarter, as profits were dragged down by ailing
economies in Latin America and Europe.
With many companies reporting earnings that blow past forecasts, U.S. stocks have soared to
record highs: since the start of the year, the S&P 500 has gained 11 percent.
Earnings on the Rise
Earnings growth is expected to pick up. According to First Call, analysts expect earnings to rise
13.2 percent in the second quarter, 24 percent in the third quarter and 21.9 percent in the fourth.
If they're right, corporate profits would surge an eye- popping 17.3 percent for the year, far more
than the average annual gain of 7 percent during the past 30 years.
Skeptics warn that earnings forecasts may not come through. Japan's nascent recovery could
stall, and some of Europe's biggest economies are teetering on the edge of recession, said First
Call Research Director Charles Hill. ''The U.S., at the moment, is still an island in a sea of
deflation,'' Hill said. ''There's a risk that second-half earnings could continue to be under pressure
rather than the big turnaround that the analysts are expecting.''
For a while, it appeared that slowing personal computer sales would depress technology company
profits.
On April 12, Compaq Computer Corp., the world's largest PC maker, plunged 22 percent after it
said falling computer prices and slow sales pushed first-quarter net income to half of what analysts
expected.
IBM Weighs In
Then IBM, the world's No. 1 computer maker, reported a 42 percent gain in profit, shattering
expectations. It's stock soared 24 percent in the next four days. ''The PC industry hasn't become
a sinkhole,'' said Laura Conigliaro, an analyst at Goldman, Sachs & Co.
Apple Computer Inc.'s fiscal-second quarter profit rose a better-than-expected 69 percent, as the
company benefited from new products including the best-selling iMac home computer. Microsoft
Corp., the world's biggest software maker, beat estimates with a profit of 35 cents a share
compared with estimates that averaged 32 cents.
Some of the nation's largest industrial companies reported higher earnings mainly by cutting costs
to make up for meager sales growth.
Boeing's first-quarter earnings surged ninefold, beating forecasts and lifting its shares, as the
world's biggest planemaker cut costs and accelerated production of commercial jetliners.
Signs of Life ''We are seeing areas that have not seen life for the last three or four years come to
life,'' said Anthony Hitschler, a managing director at Wilmington, Delaware-based Brandywine
Asset Management Inc., which oversees $8 billion in assets.
Alcoa Inc. shares have jumped 34 percent since April 7, the day the world's biggest aluminum
producer said first-quarter earnings rose an unexpectedly high 5.3 percent. Acquisitions and
cost-cutting helped the company overcome low metal prices.
Consumers were out spending in the quarter, driving up profits at automakers, cellular telephone
manufacturers and cosmetic companies.
GM and Ford Motor Co., the world's No. 1 and No. 2 carmakers, reported higher-than-expected
earnings as they trimmed expenses and sold more high-profit light trucks in North America. That
offset lower sales in Europe, South America and Asia.
Motorola Inc., the world's No. 2 maker of cellular phones, beat first-quarter earnings expectations
on April 13. Qualcomm Inc. shares surged to a record in their biggest one-day gain last week after
the cellular-phone maker's fiscal second-quarter profit beat forecasts. Lucent Technologies Inc.,
the world's No. 1 phone-equipment maker, said fiscal second-quarter earnings more than doubled
and sales rose by a third.
Avon Products Inc., the world's largest direct seller of cosmetics and beauty products, said
fourth-quarter profit rose 40 percent on strong sales in Brazil and the U.S. Profit from operations of
$73 million, or 28 cents a share, beat analysts estimates of 24 cents.
Economic recession in some Latin America countries was one of the few sources of weakness in
the quarter, hurting some companies.
Caterpillar, the world's largest maker of construction equipment, reported a first-quarter profit drop
of 52 percent because of lower prices, higher costs and slower machinery sales. The company,
which gets half its sales outside the U.S., said sales fell 37 in Latin America as Brazil's recession
cut into demand.
First-quarter profit at Coca-Cola, the world's largest beverage company, said first-quarter profit fell
13 percent as weak economies reduced sales in many overseas markets. Profit was hurt by
slumping sales in big markets such as Japan, Germany and Brazil.
Some companies did manage to overcome Latin America's drag on profits. Colgate-Palmolive Co.
said first quarter profit rose 6.6 percent as rising sales of toothpaste, deodorant and soap in North
America offset falling demand in Brazil and other Latin American countries, where the company
gets a quarter of its sales. ''Overall the strength is broad and impressive,'' said Joe Cooper, a
senior research analyst at First Call in Boston. ''With more companies beating expectations -- and
by a large margin -- analysts are raising their estimates and are gaining confidence that the trouble
spots won't stand in the way.''
NYSE/AMEX delayed 20 min. NASDAQ delayed 15 min. |
