And Now a Bullish Word From Company Chiefs
Corporate America responded with confident bemusement to the stock market’s downdraft Monday. Top executives knew that their companies’ business hadn’t suffered any sudden bad news--that order books were full, cash positions strong and the outlook healthy.
Their bullishness and financial strength are important not only for a firm perspective on the real economy, but as a potential source of stock purchases to stem the market’s decline if it goes much further.
Monday’s price decline didn’t come near the point of fazing company chieftains.
“Business is strong, never better,” said Chairman Eli Broad of SunAmerica, a Los Angeles-based provider of financial services for retirement.
“We see no reduction in demand for personal computers,” said Craig Barrett, president of Intel.
On the contrary, Barrett said, the long-term pattern among Asian nations, which have suffered currency and market turmoil in recent months, “is reassuring. Their use of PCs is increasing as they realize they can’t make it on cheap labor anymore and need to upgrade their economies.”
Similarly, Noel Watson, president of Pasadena-based Jacobs Engineering Group, said there were no interruptions in the company’s orders to build factories in Asia for pharmaceutical companies. “Our clients are not perturbed by market fluctuations.
“We just completed our annual business review,” Watson added, “and the outlook for the next three to four years is solid.”
Edward Muller, president of Irvine-based Edison Mission Energy, which operates 51 electric power plants around the world, said that “business is very good--very competitive but very good.” Muller saw no diminution of business in the Philippines and other Asian nations.
Honeywell Chairman Michael Bonsignore phoned from a plane carrying him to Europe for a business trip to say that the company’s factory automation and aviation electronics operations are doing better than ever, with no change in sight.
And so it went Monday, with companies as varied as General Electric, Motorola, Sun Microsystems and Cisco Systems confirming that business is strong and the outlook is for continuing gains of 15% and more in global markets in 1998 and beyond.
Importantly, the companies have the numbers to back up their bullish commentaries--more cash, higher profits, less debt than 10 years ago, when the stock market also took a swan dive on an October Monday.
Indeed, Moody’s Investors Service has just issued a report on the enhanced credit-worthiness of U.S. companies. Corporate pretax profits are now running at 582% of interest payments on their debt, notes Moody’s senior economist John Lonski. In 1987, profits were 204% of interest payments.
The earnings outlook for the Standard & Poor’s 500 companies hasn’t changed, noted analyst Sam Stovall of the S&P; firm. “We still see average earnings gains of 14% to 15% in the fourth quarter and strength continuing next year,” Stovall said.
The financial strength is important. It means that if stock prices continue falling, companies have ample wherewithal to buy their own stock as a good investment and support the price levels. Many companies did that a decade ago, going in the day after Black Monday, Oct. 19, to buy stock.
Now stock buybacks have become an annual practice as companies have cash to spare. And most companies Monday saw no need for special action in this market downdraft.
Business is strong, SunAmerica’s Broad emphasized. “We can earn 18% to 20% returns for our shareholders in our basic growth business.”
There will be no letup in capital investment or expansion, said Barrett. Intel is continuing its $4.5-billion capital program this year, he said. On Monday, Intel announced a $700-million purchase of semiconductor plants from Digital Equipment Corp.
A question arises: If business is so good, why did stock prices plunge?
It was a necessary evil, said Broad. “The market was getting toppy. A correction of 10% to 15% would be healthy,” he said. He suggests the Dow Jones industrial average could fall a bit more--putting it below 7,000.
Tension had built up in recent months after the dramatic gains of this year in stock prices, noted Edison Mission’s Muller. “People were looking for a reason to take money off the table.”
But he and the other top executives saw no change in the real economy of goods and services in which they do business. In fact, said one executive, “with interest rates down, it could be a good time for a company to borrow cheaply.”
Such optimism is already an antidote for market anxiety--and could become a cure for market vertigo.
More Markets Coverage
* Stocks suffered their worst drop since the October 1987 crash. A1
* How does this correction differ from the downturn earlier this year? A1
* Did the New York Stock Exchange’s trading halt work as intended? A1
* The U.S. government has no simple antidote to the painful decline. A16
* Oxford Health’s collapse spurred the rout and hurt other HMOs. D4
* Comments from traders, individual investors and others. D4
* Financial planners advise investors to ride out the meltdown. D5
* Online brokerages’ computers groaned but kept on working. D8
