Quarterly Earnings: Scare Is in the Air
Surprise profit warnings in the last two days from Intel Corp. and Motorola Inc. underscore a worrisome trend taking hold in the stock market, as an unusually large number of big companies say their earnings will fall shy of expectations.
So-called “pre-announcements” often dog the stock market for a roughly four-week period at the end of one quarter and the start of the next. But with almost a month left in the first quarter, companies are issuing warnings earlier than usual and at a rising pace, analysts say.
“We’re early on and we’ve already had a lot of activity,” said Chuck Hill, research director at First Call Corp., which keeps tabs on earnings. “The Intel situation is a precursor of more to come.”
There were already signs that the market was cooling after a vigorous rally the last two months, such as a lessening of volume and a plateau in the number of stocks making new highs, said Charles Blood, a market analyst at Brown Bros. Harriman & Co. The spate of pre-announcements renews fears about fallout from the Asian financial crisis and casts a nervous pall over investors.
The Intel news “might be the event that ushers us into a trading range and the pre-announcements are the constant dribble of bad news that keeps us from making much progress,” Blood said.
Intel shocked Wall Street on Wednesday by saying that revenue will fall 10% shy of projections and profit will come up short by an unspecified amount. Motorola said Thursday that its earnings will suffer from weak currencies and slow sales of semiconductors and pagers in Asia.
The two releases spotlight the pre-announcement season, a quarterly ritual in which companies notify Wall Street about trouble in advance of their formal earnings releases.
Pre-announcement season is a phenomenon that didn’t even exist five years ago. It has come about in recent years as companies have sought to preempt lawsuits from disgruntled shareholders. In the past, companies waited until their formal earnings reports to release bad news. But they found themselves increasingly targeted by lawsuits charging that they leaked the news early to influential shareholders, thus giving those holders cover to exit the stocks.
For that reason, the bulk of pre-announcements are negative. Companies with good news usually wait for their scheduled profit releases.
On the bright side, analysts say, while investors often overreact to bad news, they have a similar response and drive stocks up when the generally positive earnings reports themselves come out.
In fact, it was no accident the rally that began in mid-January coincided with the release of actual earnings reports. Profits were good enough to assuage investors and at least briefly lift the cloud of worry about Asia.
Companies also have found an ancillary benefit to early warnings. When they pre-announce, their stocks typically are hit and analysts lower earnings projections. Some companies can then top the revised numbers, “beat” expectations and see their stocks rise.
“Maybe they can get a little lucky,” said Spiros Segalas, money manager at Jennison Associates in New York.
The warnings typically strike in the final week or two of a quarter and extend into the first two weeks of the next quarter, until the formal reports are released. But in this quarter, Intel and Sears Roebuck & Co. have already had two pre-announcements. IBM Corp., Nike Inc. and Applied Materials Inc. have each had one.
The 109 pre-announcements this quarter are on track to surpass the 341 recorded in the year-ago quarter, according to First Call. The number of pre-announcements increases during the course of the year. In the fourth quarter of 1997, there were 529 pre-announcements, an almost 39% surge from the 382 of the year-earlier quarter.
In the fourth quarter, only 47% of companies beat analysts’ estimates, according to Zacks Investment Research, another earnings tracker. That was the first time in five years that fewer than 50% of companies topped projections. What’s more, 70% of estimate revisions nowadays are negative, a high number historically, said Ben Zacks, executive vice president.
The earnings picture might be worse than the pre-announcement figures show.
First-quarter earnings are projected to grow only 3.7% for Standard & Poor’s 500 companies over a year ago, according to First Call. As soon as analysts react to Intel’s news, that could fall to 3.2%, Hill said.
Not all market watchers are worried about pre-announcements.
The S&P; 500 index is still up almost 7% for the year and deserved a breather after its rally, said Peter Canelo, market strategist at Morgan Stanley Dean Witter.
“The market just had a hell of a move and it’s looking to take profits,” he said.
More Coverage
* Intel’s 12.6% stock plunge walloped the mutual fund industry. D3
* Motorola warned of poor earnings, blaming the crisis in Asia. D3
* Monthly closes, latest price for Intel’s shares in Investor Spotlight, D12
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Big-Name Disappointments
Here are some of the major companies that have already warned that first-quarter earnings will be below expectations:
* IBM: Warned Jan. 21 that first-quarter results would be 8% to 13% below year-ago.
* Sears: Warned Jan. 22 that credit-card losses would hurt first-quarter results.
* Nike: Warned Feb. 24 that inventory problems would cut quarterly results 26% to 37%.
* National Semiconductor: Warned Feb. 2 that quarterly results could be reduced by Asia’s problems.
* Applied Materials: Said Feb. 10 that orders in current quarter would be below expectations.
* Union Pacific: On Feb. 26 slashed its dividend and forecast a quarterly loss.
* Intel: Shocked Wall Street on Wednesday with news of 10% shortfall in quarterly orders.
* Motorola: Warned Thursday of lower quarterly earnings due to pricing pressures and weak orders.
Source: Bloomberg News
