Quarterly Earnings: Scare Is in the Air
Intel Corp.’s stunning warning about a first-quarter sales slump sent the stock market broadly lower Thursday, slashing 2.7% from the technology-heavy Nasdaq composite index amid fears that many more companies are likely to fall short of expectations.
And after the close of trading, Motorola Inc. and computer retailer CompUSA joined the chorus of tech companies projecting weaker results.
The Nasdaq index lost 47.78 points to 1,711.92, closing near its low for the day as it recorded its third-biggest point decline ever.
The stock market overall also fell sharply, but blue-chip indexes bounced off their lows late in the day. The Dow Jones industrial average sank 94.91 points, or 1.1%, to 8,444.33, after trading as low as 8,405.72.
Intel stock plummeted $10.88, or 12.6%, to $75.56 in extremely heavy trading of 92 million shares, the third-highest volume ever for any Nasdaq stock above $1.
Other tech issues sliding included Dell Computer, down $7 to $131.88; Microsoft, down $2.25 to $80.06; Compaq, down 88 cents to $27.13; and Cisco Systems, down $3.44 to $61.81.
Intel late Wednesday warned that first-quarter sales will be about 10% below fourth-quarter results because of weaker computer chip orders from personal computer manufacturers.
The news startled Wall Street, mainly because of the magnitude of the shortfall. Although some analysts said the PC industry may simply be suffering from temporary inventory indigestion, others worry that Intel could be foreshadowing either a sustained slowdown in orders for high-tech equipment, a squeeze on tech profit margins, or both.
That fear was reinforced by Motorola’s warning late Thursday that depressed Asian sales will hurt its first-quarter results.
What’s more, CompUSA confirmed market rumors, saying that it first-quarter sales will be below expectations. The stock plunged $6.50 to $26.13, even though the retailer said the problem was not unit sales of computers, but that consumers were demanding cheaper, lower-margin machines, cutting overall sales.
Nevertheless, “We’re still very bullish on demand,” said Kevin Hause, an industry analyst with International Data Corp. He said that “end-user demand for PCs among consumer and businesses appears to be fairly healthy.”
That can’t help Intel in the near-term, however. Wall Street analysts slashed their consensus estimate for the company’s first-quarter earnings to 71 cents a share from 93 cents, and the 1998 estimate to $3.22 from $3.92, according to First Call.
“There’s no reason to buy,” said Michael Lyons, a trader at Morgan Stanley, Dean Witter. “Intel is just a wake-up call here, and I’m afraid there will be more fallout through the month of March.”
“Pre-announcements [of earnings], almost by nature, are disappointing. It’s unsettling to have the first major pre-announcement come from Intel. This is a company that we’re used to delivering good news, pushing the market higher,” said Edward Yardeni, chief economist at Deutsche Morgan Grenfell.
Still, some analysts were surprised that the stock market overall didn’t suffer a deeper decline.
While the Dow’s loss was its biggest since Jan. 9, when it dove 222 points as Asia’s economic crisis worsened, losers outnumbered winners by 21 to 8 on the New York Stock Exchange, a bad showing but better than the 25-to-5 ratio of Jan. 9.
The Standard & Poor’s 500 index dropped 1.2% to 1,035.05 points but bounced up from a low of 1,030.
In Asia on Thursday, most markets dove after Intel’s announcement. Hong Kong’s index sank 4.8%, while South Korea’s lost 6.5% and Tokyo’s was off 1.5%.
Relative to those markets, U.S. stocks held up as well as they did because investors still believe the United States has the best economy, with steady growth, low inflation and relatively low interest rates, some money managers said.
“That’s basically the score,” said Philip Tasho, investment chief at Riggs Investment Management in Washington, D.C. “We’re in the best condition in this country across the board.”
But if more investors become concerned that corporate earnings growth will slow drastically this year, or even decline--a result of Asia’s woes, higher labor costs and greater competition squeezing profit margins--U.S. stock prices are dangerously high, bearish analysts contend.
“I think a significant correction has begun,” warned Michael Metz, investment strategist at CIBC Oppenheimer in New York.
Meanwhile Thursday, yields rose in the bond market ahead of today’s key report on February employment. The 30-year Treasury bond yield rose to 6.07% from 6.02% on Wednesday.
While many individual companies have warned of profit problems this quarter, overall data suggest the U.S. economy is not slowing.
Among Thursday’s highlights:
* Other losers in the tech sector included Vitesse Semiconductor, down $2.13 to $45; Texas Instruments, down $2 to $53; Sun Microsystems, down $3 to $43.56, and 3Com, down $2.38 to $35.31.
But America Online jumped $3.13 to $116.13 and Yahoo surged $3.69 to $75.31.
* Electronics retailer Best Buy followed CompUSA lower, falling $3.25 to $64.94.
* Among other companies warning of sales weakness, UAL, parent of United Airlines, fell $2.63 to $83.50. It forecast lower revenue for the year because of Asia’s woes, but said it still expects to meet earnings estimates by cutting spending.
* The Dow was weighed down by Disney, down $1.69 to $105.19; Procter & Gamble, off $1.44 to $80.69, and Boeing, down $1.06 to $52.25.
* On the plus side, Waddell & Reed Financial, a money-management company, surged $3.44 to $26.44 in its first day of trading.
