Analysts Still See Robust Earnings Despite the Moans
The list of major companies warning of slowing growth this quarter is getting longer by the day, suggesting that stock prices overall don’t belong at near-record levels.
But if this sounds familiar, you’ve got a good memory: The market goes through this routine at the end of every quarter, as companies with bad earnings news step forward early to confess.
Yet many Wall Streeters still expect corporate earnings overall to be good if not great this quarter--enough to keep the market from suffering much more than a brief setback, if that.
So far this week, two major airlines (American Airlines parent AMR Corp. and USAir Group), athletic shoe giant Reebok, restaurant chains Showbiz Pizza and Longhorn Steaks, and drug-delivery system developer Alza Corp. all have sparked deep selloffs in their stocks by forecasting weaker-than-expected quarterly financial results.
Many, though not all, of the companies have used the “weak economy”--either here or abroad or both--as an explanation for their projected earnings shortfalls. American Airlines, for example, describes its international traffic as “very weak, especially in Europe.”
But trouble in Europe should hardly be a surprise, given the depths of the Continent’s recession, analysts note. The 12-nation European Community on Wednesday predicted a bloc-wide 0.5% economic contraction this year, the worst in almost 20 years.
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Even so, while European business is an important sales component for many American companies, it’s not a make-or-break factor for most. Far more important is what’s happening with domestic demand. And on that front, nothing suggests a change in the trend of an economy growing at a moderate pace--and likewise corporate profits.
Ben Zacks, head of earnings-tracker Zacks Investment Research in Chicago, says Wall Street analysts still expect operating earnings for the blue-chip companies in the Standard & Poor’s 500 index to be 14.3% higher this quarter than a year ago. That would follow a 14% rise in the first quarter, he says.
Despite the disappointing early warnings so far by some big-name firms, Zacks adds, analysts aren’t slashing their estimates across the board--suggesting that where there are major earnings problems, they are isolated. In fact, “I see less of a downtrend in estimates going into the end of this quarter than we saw in the last few quarters,” Zacks says.
Could the analysts be dead wrong? Not all companies facing disappointing profits choose to telegraph them early, of course. By the time second-quarter reports begin to hit the market in droves in mid-July, it’s conceivable that market-wide earnings growth estimates will have come down further.
But the trend is what’s important, argues Lawrence Kudlow, economist at brokerage Bear, Stearns & Co. in New York. “There’s always a lot of grousing, but the fact is that corporate profits have been rising very nicely and steadily for six quarters,” he says.
While stock market bears’ tendency is to grab onto every negative earnings report as proof that share prices are out of whack with economic reality, Kudlow notes that the bears frequently overreact: More companies may say that they won’t meet second-quarter expectations, he says, “but they may still be ahead of a year ago.”
Consumer and industrial products giant 3M Co., for example, last week said it will probably earn around $1.50 a share this quarter, below expectations but higher than the $1.45 a share it earned in the second quarter of 1992.
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Even USAir, in forecasting a quarterly loss, took pains to note that its results still will be vastly improved from 1992, and that the trend in business is in the right direction--up.
The stock market, Kudlow says, “has been accurately predicting this profit recovery” by running up sharply in 1991 and by holding at high levels through 1992 and this year. While individual stocks that disappoint are being throttled by investors, Kudlow believes that the broad market’s tenacity says that Wall Street sees profits overall continuing to improve.
He figures that’s a safe bet. Ignore the consumer and business confidence surveys that say the economy is getting worse, Kudlow says. Business spending on technology and machinery, in particular, has been very strong and shows no sign of easing, he says.
“That’s what you’d expect in a profit recovery,” Kudlow says. “Companies are making more, and they’re spending more.”
While nobody seems to feel good about the country (if you believe the polls), this looks increasingly like “do as I do, not as I say.” Kudlow notes: “People complain, but it’s not preventing them from spending money.”
Bellwethers, Or Flukes?
Major companies in a wide array of businesses have forecast disappointing sales and/or earnings for the current quarter, slamming their stocks. But some experts say these firms are the exception in an economy that is still growing, albeit moderately.
1993 stock Thurs. Decline Company high/low price ’93 high Longhorn Steaks 25 1/2-16 11 5/8 -54% Alza Corp. 47 1/8-24 1/2 24 3/4 -47 Showbiz Pizza 35 1/2-17 1/2 19 1/2 -45 Apple Computer 65 1/4-41 1/4 41 1/4 -37 USAir Group 24 3/4-12 7/8 15 7/8 -36 Reebok Intl. 38 5/8-29 29 7/8 -23 AMR Corp. 72 7/8-55 1/2 61 1/2 -16 Ben & Jerry’s 32-22 1/4 27 -16 3M Co. 117-97 1/4 108 5/8 -7 Dow industrials 3,555-3,219 3,521.89 -1
Source: Times reports
