Strong 3rd Quarter Fails to Meet Wall Street’s Great Expectations
When Yahoo Inc. reported sparkling quarterly earnings last week, it looked as though strong corporate profits might ride to the rescue of a jittery stock market.
It isn’t turning out that way.
Disappointing third-quarter earnings this week from Intel Corp. and Motorola Inc. raised doubts about whether profits will live up to Wall Street’s grandiose expectations. And even if they do, some experts say, investors are now more worried about earnings in the fourth quarter and first half of next year.
“Current earnings are already discounted in stock prices,” said Richard Cripps, chief market strategist at Legg Mason Inc. “What’s most important is what companies see in the future.”
Shares of Unisys Corp., for example, slumped $15.69, or 37%, to $26.56 on Thursday after the computer-services company warned of slower sales growth in the next two quarters.
On the bright side, earnings for companies in the Standard & Poor’s 500-stock index are expected to balloon by 19.7% this quarter, and 16.7% for the year, as the global economy picks up steam, according to First Call Corp. The quarterly performance would be the best since early 1995.
Profits in the technology sector are expected to rise 31% in the third quarter, while financial-company earnings should improve 33%, according to First Call.
Some companies are showing impressive results. Boeing Co. shares spurted $3.13, or almost 8%, to $43.63 on Thursday after the aviation giant handily beat estimates. And despite warning about earnings last month, Apple Computer Inc. stock leaped $9.16, or 14%, to $73.19 on Thursday after results that convinced investors that sales will be strong during the holidays.
Overall, though, investors seem unimpressed. The Dow Jones industrial average managed to rebound only 54.45 points Thursday, to 10,286.61, after two days of heavy selling.
One problem is that even though S&P; earnings will continue to rise in the next few quarters, the rate of growth will start to slow, said Chuck Hill, First Call’s research chief. Hill expects third-quarter profits to end up about 22%, but thinks the growth rate will ease to 20% in the fourth quarter and 18% in the first three months of next year.
“Enjoy it while you can,” he said. “This is as good as it gets.”
Don Hays, investment strategist at First Union Capital Markets, thinks third-quarter earnings of some other tech companies might disappoint investors. He expects problems among chip and computer makers.
Hays and some other bearish analysts say the profit picture is overshadowed by other factors, such as rising bond yields and commodity prices, and fears about further Federal Reserve interest-rate hikes.
“Markets tend to peak out well before earnings peak out,” Hays reasons. “I think earnings this quarter will be pretty good, but I don’t think that’s a market savior.”
On another front, the market’s sharp losses Tuesday and Wednesday led to increased volume on after-hours stock trading systems catering to individual investors.
In general, volume on the systems has been extremely light and has raised questions about whether small investors really want the service.
Nevertheless, one system, MarketXT, said investors submitted orders to trade 300,000 shares Wednesday, compared with an average of 40,000 shares a day in September.
Because investors submit “limit” orders to trade at specific prices, only a fraction of orders are actually executed, meaning an investor can find a corresponding buyer or seller.
Only about 35% of orders were executed in September, said Michael Satow, MarketXT president. On Tuesday, the day Intel released its profit figures after the market closed, about three in five orders were executed, he said. But that fell to three in 10 on Wednesday.
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Still Looking Solid
Blue-chip third-quarter earnings are on track for their best year-over-year gains since early 1995, despite some trouble spots. Expected earnings for a sampling of large companies:
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Ticker Approx. 3rd-qtr. ’99 3rd-qtr. Company symbol report date estimate ’98 actual Applied Materials AMAT Nov. 17 $0.64 $0.07 Qualcomm QCOM Nov. 2 0.88 0.27 MCI WorldCom WCOM Oct. 28 0.54 0.19 AOL AOL Oct. 20 0.13 0.05 Dell Computer DELL Nov. 11 0.20 0.14 Boeing BA Oct. 14 0.49 0.36 Cisco CSCO Nov. 9 0.23 0.17 Pfizer PFE Oct. 11 0.21 0.17 Sun Microsystems SUNW Oct. 14 0.31 0.25 Wal-Mart WMT Nov. 10 0.28 0.23 Microsoft MSFT Oct. 19 0.34 0.28 IBM IBM Oct. 20 0.90 0.78 American Express AXP Oct. 25 1.42 1.25 Merck MRK Oct. 21 0.64 0.56 Coca-Cola KO Oct. 21 0.32 0.35 AT&T; T Oct. 25 0.53 0.67 Disney DIS Nov. 3 0.10 0.16 EBay EBAY Oct. 26 0.01 0.02 Amazon.com AMZN Oct. 28 -0.28 -0.08 S&P; 500 index
Estimated Company % chg. Applied Materials +814% Qualcomm +226 MCI WorldCom +184 AOL +160 Dell Computer +43 Boeing +36 Cisco +35 Pfizer +24 Sun Microsystems +24 Wal-Mart +22 Microsoft +21 IBM +15 American Express +14 Merck +14 Coca-Cola -9 AT&T; -21 Disney -38 EBay -50 Amazon.com * S&P; 500 index +19.7
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* A loss in any period makes a percentage change not calculable.
Source: First Call
