Slowdown Affects Firms in Area Unevenly
The economic slowdown is beginning to take its toll on Southern California companies across a broad range of industries, a random survey suggests.
But the damage so far seems to be significant only in such fields as housing and autos. Many companies say they are seeing only slight declines in business, and for some there is still no hint of a recession.
Indeed, earnings for the quarter ending Sept. 30 could be surprisingly strong for many companies. Yet it seems unlikely that those numbers will stop the downward spiral in stock prices, experts say. The psychology of a recession and bear market may now be too powerful to reverse until it has run its course.
“I think we’re going to talk ourselves into a recession,” laments Bruce M. Jaffe, executive vice president at Los Angeles-based Bell Industries, a major electronics distributor. That refrain was echoed by executives at many Southland firms.
A look at how the quarter is shaping up, by key Southland industries:
* Electronics/High-Tech: As a supplier of electronic parts and also products for the building, automotive and graphic arts industries throughout the West, distributor Bell Industries might be considered a proxy for the broad economy. Through July and August, sales were running about 4% ahead of last year, Jaffe said. But in recent weeks, he said, “our order input level has slipped a little.”
Part of that probably is seasonal, he said. However, he acknowledges that more of the companies that buy Bell’s parts appear to be growing cautious about demand for their finished products. “There’s a lot of quote activity (buyers asking about prices), but then it just sits there,” Jaffe said. And Bell itself has grown more conservative, ordering less than it had earlier in the summer, he said.
Still, Bell expects to report earnings for the current quarter that are up at least 10% from a year ago, Jaffe said, helped by tighter cost controls.
At Irvine-based Western Digital, a producer of semiconductors, disk drives and other parts for computer makers, July and August were “very soft,” said Robert Blair, vice president of investor relations. But the summer months typically are the computer industry’s slowest, he notes.
Though Western has cut its quarterly earnings expectation to about 23 cents a share from 27 cents, Blair said the firm “sees no signs yet to indicate that there is anything (in the slowdown) in addition to the usual seasonal factors.” One indication that computer demand hasn’t collapsed, he said, is that the firm’s newest products--such as its semiconductor set for laptop computers--”have seen no falloff in demand.”
Elsewhere, El Segundo-based Computer Sciences Corp., which installs and operates computer systems for government offices and private companies, says orders for its services continue to come in strong. Despite federal budget cuts, “the government still has to get a lot of vital services from the private sector,” said Jim Furlong, CSC’s corporate communications chief. Likewise, he said, “we don’t yet see any holding back” by corporate users. Quarterly earnings are likely to be flat only because expenses have been rising with new servicing contracts and greater marketing efforts, he said.
* Consumer Businesses: Companies directly dependent on the consumer--whose spending is the economy’s most important engine--are the ones most worried about recession talk. And for good reason: They’re being hit first and hardest.
Home builder Kaufman & Broad, for example, expects to see earnings plunge perhaps 53% in the current quarter, as Southland home sales have dried up since Iraq invaded Kuwait on Aug. 2. “About 90% of it is people feeling uncertain” rather than any effect from slightly higher interest rates, says R. Chad Dreier, K&B;’s chief financial officer.
Likewise, Riverside-based Fleetwood Enterprises, the leading maker of recreational vehicles, says its RV sales to dealers already are off 20% this quarter. While actual consumer RV purchases haven’t come down as much, dealers are figuring that it’s only a matter of time, so they’ve slashed orders, said Paul Bingham, Fleetwood’s chief financial officer.
Predicting bank and S&L; earnings, meanwhile, has become an exercise in futility. Many analysts expect quarterly operating earnings to be solid at many Southland financial firms, but the probability of new real estate loan losses leaves analysts with no confidence in their numbers.
On the entertainment side, the big question is what’s happened with Disney’s theme-park attendance during the quarter. Analyst Jeffrey Logsdon at Seidler Amdec Securities says “everybody’s sort of throwing darts” to come up with attendance numbers, since Disney never discloses them. Logsdon looks at it this way: Attendance probably softened in the summer, but if it was off sharply, Disney would have started new promotional efforts, which it hasn’t. As for the fall season, “they’re saying bookings are strong,” he said--which suggests that consumers haven’t lost confidence in Disney’s future earnings power, recession or no.
Wall Street expects Disney to post a 17% earnings gain for the quarter. But the stock’s decline may already have taken on a life of its own, some traders warn.
As for the one supposed beneficiary of the Iraqi invasion--Big Oil--it isn’t clear what kind of earnings gains companies like Atlantic Richfield or Unocal will post for the quarter. Many Wall Street estimates for those two companies still are low, on the assumption that they will somehow offset what could be an embarrassing windfall from the recent surge in oil prices.
* Medical Supplies: The health care business is supposed to be recession-proof, and so far that appears to hold true. At Diagnostic Products, a fast-growing Los Angeles-based maker of test kits that hospitals use to quickly identify substances in blood and other body fluids, orders are “looking good and on track,” both domestically and overseas, said Chairman Sigi Ziering. In fact, the weak dollar is a big help to Diagnostic Products, because it lowers the price of the firm’s goods overseas. The company derived about 70% of sales from foreign markets last year.
Another booming Southland health care firm is Thousand Oaks-based Amgen, perhaps the nation’s premier biotech company. Helped by roaring sales of its red-blood-cell-stimulating drug Epogen, the firm should report earnings of about 27 cents a share for the quarter, up 145% from 11 cents a year ago.
* Defense: The Iraqi invasion helped change some minds about the future of U.S. defense spending, but it can’t help the companies much in the short term. Even so, many defense contractors may surprise investors with strong third-quarter earnings reports--if only because they’ll be up against a lousy period a year ago, when project writeoffs were rampant.
Lockheed, McDonnell Douglas and Northrop all should benefit from comparisons with weak numbers a year ago. And El Segundo-based Rockwell, less a defense contractor today than a growing player in other fields, such as electronics and auto parts, could post a quarterly profit rise in the neighborhood of 14%. A spokesman says the firm “hasn’t seen any significant change in business that might result from a recession.”
HOW THE QUARTER SHAPES UP
As the economy slows, here’s a look at how current-quarter earnings should come in for a cross-section of Southland companies. For most, the quarter will end Sept. 30.
Est. Thurs. Current quarter EPS pct. stock Company Year ago ’90 est. chng. close Western Digital -$0.09 $0.23 NA $7 1/4 Vons Cos. -0.15 0.34 NA 19 1/4 FileNet -0.17 0.17 NA 11 1/4 Amgen 0.11 0.27 +145% 48 Diagnostic Products 0.30 0.37 +23% 35 1/2 Disney 1.54 1.80 +17% 88 7/8 Rockwell 0.50 0.57 +14% 25 Bell Industries 0.37 0.41 +11% 14 3/4 Atlantic Richfield 2.19 2.23 +2% 140 Computer Sciences 0.84 0.84 nil 38 1/8 Fleetwood Indus. 0.57 0.40 -30% 19 Kaufman & Broad* 0.57 0.27 -53% 6 7/8
* quarter ended Aug. 31
NA: not applicable (profit versus loss)Source: Earnings estimates from Zacks Investment Research, Bateman Eichler, or company estimates
