Firms Foresee a Winter of Discontent

The number of companies saying first-quarter earnings will be disappointing is up 23% from the same period a year earlier, a new tally shows.

That could be another blow to the sinking U.S. stock market, if it heralds weaker-than-expected profits for many other companies that have yet to finish adding up their first-quarter numbers.

In terms of corporate “preannouncements” of poor earnings, “this has been a quarter from hell,” said Joe Abbott, an analyst at IBES International Inc. in New York, which tracks corporate earnings forecasts.

Especially troubling is the growing number of former earnings growth stars that are among the companies reporting unexpected softness, Abbott said.

Those ranks included Informix, a database software company that has missed forecasts just once in the last five years, and retailer Toys R Us.

In all, 133 companies have already said first-quarter earnings won’t live up to analysts’ average forecasts, versus 108 in the same period last year, according to IBES, which ran the study for Bloomberg News.

Among the industry sectors with a large number of companies preannouncing weak results is the computer-networking business. Shares of Cascade Communications and 3Com, for example, have lost more than half their value this year owing to forecasts of slower growth.

“We have blowups every quarter, but it sure seems like there’s more,” said Brian Bythrow, an analyst for Parkstone Small-Cap Fund, which has fallen 24% this year because some of its major stock holdings have plummeted after bad earnings forecasts.

Yet the number of preannounced disappointments has declined from the fourth quarter. By Jan. 2, 156 companies had said they would fail to make their numbers in the fourth quarter.

Still, because the U.S. economy has been so strong this year, many analysts have been expecting companies to exceed sales and earnings targets, not fall short.

With the Federal Reserve Board tightening credit, pushing interest rates up in the bond market, Wall Street is betting on strong earnings to offset the negative effect of higher rates.

Some investors say they expect stocks to rally now that the earnings preannouncement period is over.

“You should get a market trending up, with the preannouncements out of the way,” said Robert Turner, president of Turner Investment Partners. “We don’t see [higher] interest rates having a big impact on profits. A lot of this is psychological.”