Investors Losing Fascination With ‘Bellwether’ Stocks
Only in the stock market could 2 cents cost $3.8 billion.
Food and tobacco giant Philip Morris came up 2 cents a share short in its third-quarter earnings report Thursday, setting off alarm bells among its investors and causing a mini-panic in the stock.
By the close, Morris shares had slumped $4.25 to $79.75, or 5%, wiping out $3.8 billion of the firm’s market value.
Combined with IBM Corp.’s dismal profit report, the Morris missile threatened early Thursday to sink the 30-stock Dow Jones industrial average, of which IBM and Morris are key components. Yet the Dow lost just 20.80 points to 3,174.68, and most broader stock indexes closed higher on the day.
When they were still considered “bellwether” stocks in the 1980s, a rout in a major issue such as IBM or Morris would usually be enough to shake the overall market as well.
But that was back when IBM, for example, truly led the computer industry--so that if IBM tripped, investors could reasonably assume that the industry as a whole would follow.
Of course, those leadership days are long gone for bumbling IBM, as smaller companies have bitten off major chunks of its myriad technology markets. And increasingly, investors have lost their fascination with other alleged bellwethers, most recently drug titan Merck and Coca-Cola, both of which have slumped much worse than the Dow itself in recent months.
In a slow-growth economy in which even the most savvy corporate players can face tough going, many investors are less concerned with owning “name” stocks than with owning those that can provide the coveted “pleasant earnings surprise”--and preferably on a repeat basis each quarter. The longer the string of good surprises, the bigger the crowd that chases the stock.
Admittedly, this can be a high-risk game. Once identified, investors “keep buying and buying such stocks until the company doesn’t make the (earnings) estimates--then they run like hell to the next one,” says Michael Sherman, investment strategist at Shearson Lehman Bros. in New York.
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That mentality victimized Philip Morris on Thursday. It wasn’t merely that the firm’s earnings fell short of expectations, however--it was why they fell short: Domestic cigarette shipments, Morris’ cash-cow business, eased slightly in the quarter. Worse, Morris said domestic shipments of all tobacco products in the fourth quarter will be 10% below year-ago results.
Analysts say Morris is finally running into a wall as it tries to raise domestic cigarette prices to compensate for America’s declining smoker population. While the company’s international tobacco operations and global food businesses provide other avenues for growth, Wall Street is petrified that Morris’ legendary 20% earnings growth will slow measurably if domestic tobacco sales trends persist.
Other consumer-products companies have faced similar pricing pressures lately, as consumers show no sign of returning to the free-style spending of the 1980s. On Wednesday, baby food king Gerber Products shocked Wall Street by forecasting lower quarterly earnings. Its stock sank $2 Wednesday and $2.375 Thursday to $32.625. Suspicions about future pricing problems also dog the major drug stocks, with national health care reforms on the docket.
So where can investors find decent earnings in a slow-growth economy? A few ideas:
* Many large--and healthy--regional banks and other niche financial services firms are profiting handsomely from the low interest rate environment. On Thursday, L.A.-based insurance firm Broad Inc., which specializes in selling annuities to individual investors, told analysts that earnings in the year ended Sept. 30 should top current estimates of $1.60 to $1.70 a share. Broad shares closed unchanged at $22.375 Thursday, just under their 1992 high of $23.375.
* Despite IBM’s woes, many technology companies are thriving. Motorola, a leader in semiconductors and cellular communications, reported third-quarter earnings up 39% this week. “If you’ve got the muscle and the market niche, you can do well” in the tech business today, says A. C. Moore, strategist at Argus Investment Management in Santa Barbara. The stock rose $1.125 to an all-time high of $92.50 Thursday.
* Just ask “who’s selling more stuff?” says Mark Stumpp, research chief at Prudential Diversified Investment Strategies. Where you find strong sales growth in this tough economy, you’ll often find strong earnings. Toy giant Mattel, for example, said Thursday that it’s on track to boost sales by double digits again in 1993, helped by new growth overseas. Mattel shares added 12.5 cents to $23.50.
Thursday’s Earnings: The Good and the Bad
Here are some of the companies surprising Wall Street for better and for worse on Thursday with third-quarter earnings per share (EPS). The “est.” column shows analysts’ consensus estimate for the quarter.
Where results beat expectations . . .
Quarterly EPS: Stock Price Company Est. Actual Close Chng. Cooper Tire $0.34 $0.38 $29 3/8 +1 1/8 Mattel 0.68 0.71 23 1/2 + 1/8 PDA Engnring 0.06 0.11 13 7/8 + 7/8 Seagate Tech 0.61 0.86 15 3/8 +1 7/8 StandardRegister 0.27 0.31 17 3/4 + 3/4 W.W. Grainger 0.64 0.70 51 5/8 +2
. . . and where they lagged
Quarterly EPS: Stock Price Company Est. Actual Close Chng. Merck $0.56 $0.55 $43 7/8 + 3/8 Parker Hannifin 0.38 0.33 27 - 7/8 Philip Morris 1.46 1.44 79 3/4 -4 1/4 Sealright 0.52 0.50 21 1/2 -1 Waste Mngmnt. 0.46 0.42 36 3/4 - 3/4 Xilinx 0.27 0.26 15 3/8 -1 7/8
Estimates from Institutional Brokers Estimate System and Zacks Investment Research.
