How Will Asia Hit Earnings?

Ever since Asia’s financial meltdown struck Wall Street with full force in October, investors have held their breath, worrying about its negative impact on U.S. corporate earnings.

The market feared that floundering Asian countries would buy fewer U.S. products while a torrent of cheaply priced Pacific Rim exports could force U.S. companies to cut prices domestically. All this would come, they feared, at a time when profit growth already would be harder to come by because companies had little fat left to trim after years of steady cutbacks.

Investors got a taste of that bad news Monday when technology giant Motorola Inc. fell three cents short of analysts’ fourth-quarter earnings estimates. The maker of computer chips and cellular phones said weak Asian economies partially hurt sales and pricing.

Naturally, it’s too soon to draw a definitive conclusion about corporate profits from one company’s numbers. A more important litmus test comes today when influential Intel Corp. unveils its results. But if Motorola is any indication, U.S. companies are likely to have a tough time producing the buoyant earnings that investors have come to expect in the last three years. And if that’s the case, the stock market could be in for more shocks in the months ahead, experts say.

“Assuming there’s not some unusual explanation put forward [by Motorola] to reassure the market and you take this at face value, it certainly doesn’t look very positive,” said Chuck Hill, research director at First Call Corp., a Boston firm that tracks earnings projections.

When the fourth quarter began on Oct. 1, stock analysts expected the companies that make up the S&P; 500-stock index to report aggregate earnings growth of 13.2%, according to First Call.

But those estimates have come down steadily ever since the Asian turmoil hit U.S. markets, when the Dow Jones industrial average plummeted 554 points on Oct. 27. As companies report their quarterly results in the next few weeks, analysts now look for growth of just 7.8%.

The outlook for individual sectors with heavy Asian exposure has slid much more. Technology profits, for example, were projected to grow 21% in the fourth quarter. Analysts now expect 10%. Among paper, steel and other basic materials companies, which are vulnerable to cheap exports from Asia, the earnings forecast has slumped to 9% from 22%.

Even more troubling, the prognosis for the fourth quarter of 1997 is relatively healthy compared with the earnings expected in the first half of this year.

Though a number of companies already have blamed Asia for earnings shortfalls, the true damage to financial statements probably won’t show up until figures for the first and second quarters are released later this year. That’s because it takes time for Asian clients to cancel orders or for cheap Asian exports to take their toll. And some companies undoubtedly will divulge poor earnings only after their attempts at masking their problems have failed, analysts say.

“Fourth-quarter growth is not going to be that bad,” said Don Hays, chief investment strategist at Wheat First Butcher Singer in Richmond, Va. “The fourth quarter is going to be the last good quarter. After this, we think every quarter this year is going to be disappointing.”

Not everything is dismal on the earnings front, however.

After an early-morning sell-off, stocks of large companies like Intel and Microsoft Corp. rallied solidly Monday on hopes of respectable profits. Investors had become so pessimistic in recent weeks that many stocks were priced as though poor earnings were guaranteed, analysts said. To some investors, they were a bargain.

That thinking was reinforced when three well-known Wall Street strategists--including Abby Cohen at Goldman, Sachs & Co.--made positive comments about U.S. stocks.

In a report to her firm’s clients, Cohen said the negative impact of Asia on U.S. earnings will be “muted.” U.S. companies sell all over the world, she said, and don’t rely exclusively on Asia. What’s more, because the U.S. imports more from Asia than it exports, the region’s wave of currency devaluations could lower production costs for some U.S. companies.

Cohen, who has become one of Wall Street’s most influential analysts because her consistently bullish market calls have been on target, looks for 8% profit growth this year. When the 2% inflation rate is subtracted out, the 6% real profit growth rate tops the historic pace. As for stock prices, Cohen argues that investors will be cheered by the durability of profit growth, even at reduced levels, and be willing to live with a drop in the pace of profit growth.

It also should be noted that dire profit warnings have been sounded in the past several years and companies have beaten them repeatedly.

Still, most Wall Streeters are bracing for the worst this time around.

The Asia turmoil now scares most of Wall Street because it’s dragged on for so long. Most money managers expected the Asia crisis to pass quickly and underestimated its impact in the U.S.

Most now acknowledge they don’t know how deep Asia will cut.

“It’s anybody’s guess as to how things work out in Southeast Asia,” said Alan Ackerman, strategist at Fahnestock & Co., a New York investment firm.

In part because they have limited overseas exposure, earnings of smaller companies are expected to far outdistance their larger brethren this year. Small-company profits are projected to expand 19% in 1998 vs. 13.8% for the S&P; 500. But that’s had no effect on Wall Street, where investors are still clamoring for big--and supposedly safe--stocks.

“Money has to go somewhere and it’s going to go into the multinationals before it goes into the secondaries, if it goes into the secondaries at all,” said Larry Rice, chief investment officer at investment firm Josephthal Lyon & Ross Inc.

The airline sector is one of the few that Rice expects to do well in the fourth quarter. Low fuel prices and a strong U.S. economy are helping profits. But Rice points out that airlines are a perennially troubled industry that investors are flocking to, in part because of fear of other sectors.

“It’s not the quality group you want leading this thing,” he said.

Motorola earned 65 cents a share in the fourth quarter. But Wall Street expected it to take in 68 cents.

Though it’s a huge technology company, it’s track record in meeting Wall Street estimates has been mediocre. It’s fallen shy three of the last six quarters. Therefore, Wall Street might not take its results as a barometer of the broad market.

Still, investors may choose to focus on the words of Motorola’s chief executive, Christopher Galvin.

“We expect the economic conditions in certain markets in Asia that affected fourth-quarter results to continue for at least the first half of 1998,” he said in statement accompanying the earnings release.

* MISSED: Motorola disappointed Wall Street with the season’s first major earnings announcement. D3

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Expectations for the Giants

Earnings have been rising sharply at the nation’s largest companies, with many posting increases near or well above historical averages in recent years. Analysts still expect strong earnings growth for the next three to five years, but not at the same torrid pace. U.S. companies with the largest market capitalizations, ranked by analysts’ projected earnings growth for the next three to five years.

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3-yr. EPS Proj. EPS P/E excl. Ticker growth growth xord. Friday symbol Company rate % rate* items** close CSCO Cisco Systems 41.1% 32.2% 46.9 $54.25 MSFT Microsoft 40.8 25.0 48.2 127.00 LU Lucent Technologies --2.8 20.9 86.5 74.75 IBM IBM 50.1 20.1 16.7 100.38 BA Boeing 6.1 19.8 52.5 45.38 INTC Intel 30.7 19.3 18.2 71.88 G Gillette 21.2 17.3 51.7 98.88 MO Philip Morris 23.6 17.3 16.9 45.00 LLY Eli Lilly 52.1 16.8 negative 66.63 DIS Walt Disney 12.0 16.8 33.5 96.00 PFE Pfizer 43.9 16.2 44.5 73.81 KO Coca-Cola 18.6 16.0 39.0 64.13 HWP Hewlett-Packard 28.3 15.6 21.0 62.00 PEP PepsiCo --10.0 15.0 50.4 34.75 MRK Merck 19.5 14.7 28.1 102.88 TRV Travelers Group 21.1 14.5 17.2 47.69 WMT Wal-Mart Stores 9.4 14.3 26.1 38.19 SGP Schering-Plough 16.4 14.0 32.8 61.69 AIG American Intl. Group 15.2 13.7 22.6 103.19 GE General Electric 21.6 13.5 30.1 72.50 JNJ Johnson & Johnson 16.5 13.5 26.7 64.63 BMY Bristol-Myers Squibb 14.3 13.1 28.8 89.81 PG Procter & Gamble 16.4 13.0 31.3 78.88 FNM Fannie Mae 10.4 12.9 20.8 56.94 ABT Abbott Laboratories 12.6 12.5 25.5 67.25 DD DuPont 98.9 12.4 20.4 54.31 AHP American Home Products 7.8 12.2 24.9 76.56 CCI Citicorp 25.2 11.7 16.2 115.00 F Ford Motor 17.8 10.0 8.4 44.00 SBC SBC Communications 13.1 9.7 38.2 71.56 GTE GTE 41.1 9.6 16.5 49.50 T AT&T; 13.2 9.2 22.1 60.81 BLS BellSouth 40.3 9.2 17.3 55.19 CHV Chevron 27.2 8.5 16.4 71.13 MOB Mobil 13.3 8.3 16.2 65.50 BEL Bell Atlantic 5.2 8.2 31.1 86.56 XON Exxon 12.6 7.3 17.1 58.13

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* Projected earnings over the next three to five years

** Price-to-earnings ratio excluding extraordinary items. P/E from Market Guide based on Friday price. Note that P/E ratios can vary by definition and source.

Sources: Market Guide; earnings estimate data from First Call. For more information on Market Guide, leading and lagging equity sectors, and company reports, go to http//www.marketguide.com, or visit The Times’ Web site at https://www.latimes.com/HOME/BUSINESS/TIMES100/tmarket.htm