Corporate Results Turn Out to Be Not So Bad After All

Corporate profits aren’t falling off a cliff.

That’s the message so far in the handful of fourth-quarter earnings reported to Wall Street, and some of those announcements helped stabilize a very jittery stock market Thursday.

It is, of course, very early in the earnings- reporting season, so drawing any broad conclusions is admittedly risky. But good surprises are always better than bad surprises, and so far quite a few companies are beating analysts’ consensus estimates of fourth-quarter earnings--despite the apparently weakened U.S. economy in the waning months of the year.

Wall Street needs that kind of news. Stock prices are driven by two factors in the long run: interest rates and earnings. With the federal balanced-budget talks in stalemate in Washington, bond yields have been backing up. If, on top of that, investors began to believe that corporate earnings will be dismal, the bull market would almost assuredly end.

IBES in New York, which tracks brokerage analysts’ earnings estimates against actual results, reports that 231 companies have reported fourth-quarter numbers so far, and that 108 of those companies beat estimates. By contrast, 76 companies were below estimates. The rest precisely met expectations.

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Although most of the publicity this week has gone to major corporate earnings disappointments--such as Motorola’s lousy results and Apple Computer’s projected fourth-quarter operating loss--the list of companies reporting double-digit earnings gains for the quarter encompasses a broad spectrum of industries:

* Some specialty semiconductor makers had a stellar fourth quarter, which fits with many industry officials’ insistence that the computer-chip business is still riding a boom. Xilinx, a producer of programmable chips, said Thursday that quarterly earnings rocketed 95.2% compared with a year ago. Its shares zoomed $3.56 to $31.81 on Nasdaq.

International Rectifier, an El Segundo-based manufacturer of power semiconductors that improve the performance and energy efficiency of electronic and electrical equipment, said its earnings soared 66.7% on a 37% increase in sales--a sign that the company’s profit margins are still rising, despite falling margins at some producers of less-specialized chips. The firm’s shares gained $3.625 to $23.875 on the NYSE.

* In the financial services field, earnings at banking giant J.P. Morgan leaped 87.5% for the quarter on the strength of its trading, investment management and corporate-finance businesses. Federal National Mortgage Assn., the nation’s biggest mortgage investor, also weighed in with healthy operating earnings, up 14.4%.

* Even the home-building sector provided some surprises on Thursday. Kaufman & Broad, California’s biggest builder, posted fourth-quarter earnings of 45 cents a share, up 15.4% from a year earlier and substantially better than analysts’ consensus estimate of 39 cents. The company said expansion outside California offset less-exciting results in the state. Total sales rose 18.4%.

Altogether, reports like the ones above give Wall Street more confidence that the average U.S. company will end up posting fourth-quarter results that are at least close to analysts’ still-lofty expectations.

Earnings-tracker Zacks Investment Research in Chicago says analysts’ consensus estimates work out to an average expected rise of 12% in quarterly operating earnings for the Standard & Poor’s 500 list of blue-chip companies. Zacks’ chief Ben Zacks says he doubts that Corporate America will meet that estimate. “I’d see 9% to 10% as more likely,” Zacks says, reflecting the economy’s slowdown.

But the key point for investors to remember is that earnings overall are still going up--which means that the stock market as a whole has at least a fighting chance to keep advancing, if indeed the International Rectifiers of the business world can continue to outnumber the Motorolas.

For full-year 1996, IBES says analysts expect the S&P; 500 companies to post earnings gains of 14.7% over 1995, on average. That, too, may be overly optimistic. But even a gain of half as much could still lend strong support to the bull market--as long as investors believe that 1997 is more likely to bring fresh strength in earnings rather than a recession and an earnings downturn.

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Still Impressing

Here are some of the companies that have reported strong fourth-quarter earnings gains this week, in spite of the U.S. economy’s apparent slowdown. *--*

4th qtr. Change vs. Company EPS year ago Xilinx $0.41 +95.2% J.P. Morgan 1.80 +87.5% Intl. Rectifier 0.30 +66.7% Seagate Technology 1.44 +54.8% Exel Ltd. 1.51* +25.8% Lennar 0.55 +17.0% Kaufman & Broad 0.45 +15.4% State Street Boston 0.79 +14.5% Fed. Natl. Mortgage 2.31* +14.4% MathSoft 0.06 NA

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* operating earnings

NA: not applicable (loss in year-ago period).

Source: Reuter, Dow Jones