Reading Between the Lines
Does Intel Corp. have any more rabbits to pull out of its hat?
That’s the question equity investors might well be asking, given the giant semiconductor company’s recent history of rescuing slumping markets with gratifyingly sunny quarterly earnings reports.
The stakes may be much higher right now for Intel and a handful of other “bellwether” companies that are due to announce their first-quarter earnings over the next few weeks.
With interest rates on the rise, investors are counting on strong corporate profits to justify further buoyancy in stock prices.
That’s especially true in the wake of the equity market’s slide in recent weeks--a slump that has provoked some analysts to wonder out loud whether Wall Street is just experiencing a long-awaited correction, or the start of a killer bear market.
“The bond market is in a trading range, so one stimulus to an equity recovery in mid-to-late summer is missing,” says Douglas R. Cliggott, an equity strategist at J.P. Morgan Securities. “So the burden on earnings expectations is even stronger.”
Intel’s report, expected about April 15, is bound to be one of the most closely watched. Not only is Intel the semiconductor industry’s dominant company by a wide margin, but twice last year--during a tech-stock earnings scare in July and again in September--Intel earnings announcements provided a sorely needed tonic for the market’s beleaguered bulls.
On the other end of the chip-making spectrum, Motorola on Monday posted first-quarter earnings of 53 cents a share, compared with 63 cents in the year-earlier quarter. That 15.9% drop actually beat the average estimate of analysts, many of whom were forecasting a 25% drop. Motorola reported the earnings after the close of the market; its shares gained $1.375 to close at $61.125 on the New York Stock Exchange.
Other companies whose earnings will be eyed closely for signs of whether overall profits can hold up will be consumer nondurables leaders Procter & Gamble and Gillette. Also, retailers like Wal-Mart and Price/Costco may give investors a further clue to whether consumers are still buying. Among widely held stocks, IBM, always a center of attention, may draw special scrutiny because it has been hit recently by a spate of skeptical analysts’ reports.
Of industry groups regarded as bellwethers of corporate health, software makers are projected to turn in results 34% better than the first quarter last year, according to IBES Inc., which tracks earnings.
The pacesetter in software, of course, is Microsoft, which is expected by analysts to post earnings about 41% ahead of last year.
Elsewhere, companies in the drug sector are expected to register an earnings gain of about 12% overall, according to John Eliseo, an analyst at IBES.
In sum, few market watchers expect first-quarter earnings reports due out over the next couple of weeks to be very troublesome. Among other things, the strong domestic economy, which provoked the Federal Reserve Board to raise short-term interest rates on March 25, is likely to translate into generally strong profits.
“I think first-quarter earnings will be just fine,” says Abby Joseph Cohen, a managing director and co-chair of the investment policy committee at Goldman Sachs.
Arguing that corporate “pre-announcements” of quarterly earnings (which generally presage bad news) have been sparse, she adds: “I don’t think there will be much in the way of aggregate disappointment.” For all of 1997 Cohen expects earnings of the S&P; 500 companies to register a 10% growth rate over last year, about the same as 1996’s growth.
But analysts do see profit growth deteriorating in some key sectors later this year. Some market-watchers believe that investors are already conditioned to look gloomily on the coming quarters.
One danger sign is the recent strength of the dollar and weak economic growth among America’s principal trading partners. That could cut into profits at major companies with significant overseas operations.
Any doubts that traders are highly sensitive to this threat evaporated on March 21, when Eastman Kodak shares got hammered down 10% after executives hinted that foreign-exchange costs and Europe’s still-weak economic climate might dilute earnings.
Higher interest rates and an expected domestic economic slowdown later this year also could weigh on earnings, particularly in the banking and financial services sectors.
“Interest-sensitive stocks are getting pummeled now not because of this quarter’s earnings,” says Benjamin Zacks of Zacks Investment Survey, which tracks securities analysts’ earnings projections, “but future earnings and the expectation of further rate hikes” by the Fed.
One sign of investor doubts is how the market has reacted to some key earnings reports in recent weeks. Companies that fall short of expectations get hit savagely, but companies that meet projections don’t get rewarded. Nike, for example, dropped $2.25 to $65.25 on March 21, the day after beating estimates with a 77% gain in quarterly profits over a year earlier. The stock has since plunged to $54.875.
That gives a hint of what could befall Intel if it falls short of Wall Street’s consensus estimate of a 100% profit gain in the first quarter, to $2.05 a share compared with $1.02 in the first quarter of 1996.
“Sure, if they come in at the low end they will be shot,” says Jonathan J. Joseph, who follows the company for Montgomery Securities in San Francisco. “But that’s not our forecast.” He expects Intel to earn $2.08 a share in the quarter.
Indeed, few companies are as good as Intel at managing investors’ expectations--and meeting them. Although Chairman and Chief Executive Andrew Grove has issued a string of optimistic forward-looking commentaries on his company’s and the industry’s prospects, he has proved to be consistently right, giving him and Intel an enviable, if not unique, credibility on Wall Street.
In any event, not all analysts are equally nervous about earnings for the rest of the year. Goldman Sachs’ Cohen, for one, argues that the nearly ideal environment for stocks that has persisted over the last few years will continue, with strengthening economies in Europe fueling earnings of U.S. multinationals even as the United States starts to slow down.
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Watch These Earnings
First-quarter financial statements could be a major factor in moving the stock market in the coming weeks--especially if there are big surprises. Some major stocks and average analysts’ expectations for earnings per share (EPS).
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1st quarter 1st quarter Pct. Company ’96 EPS ’97 est. EPS change Intel $1.02 $2.05 +101% Microsoft 0.44 0.62 +41 Coca-Cola 0.29 0.37 +28 Procter & Gamble 1.01 1.24 +23 Merck 0.70 0.83 +19 Wal-Mart 0.25 0.29* +16 General Electric 0.91 1.02 +12 Eastman Kodak 0.80 0.82 +3 IBM 2.48 2.33 --6
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*Quarter ends April 30; others ended March 31. Announcements generally follow by about two weeks.
Source: Bloomberg News, IBES mean esimates as of Friday, 4/4
