BofA’s Profit Warning Triggers Wall St. Sell-Off
Bank of America led another chorus of earnings warnings Wednesday, telling investors that deteriorating loan quality would slash fourth-quarter profit.
The news helped trigger renewed selling on Wall Street, where the Dow Jones industrials slid 234.34 points, or 2.2%, to 10,664.38, and Nasdaq also pulled back after Tuesday’s surge.
BofA’s announcement is part of what is shaping up as the worst quarter in at least five years for earnings “confessions” from corporate America.
The flood of bad news is mainly due to the slowdown spreading through the economy, analysts say. But it also stems in part from new Securities and Exchange Commission rules prodding public companies to be more forthcoming about releasing significant news.
Other recent warnings from Apple Computer, Circuit City and Altera have lifted the total number of earnings “pre-announcements” to more than 300--far above the 233 in the fourth quarter of 1999, according to earnings tracker IBES International.
“That’s extremely high, considering we’re not even in official confession season yet,” said IBES strategist Joseph S. Kalinowski.
By January, it appears certain that this quarter will log the highest number of profit warnings since IBES began keeping track of them in 1995, Kalinowski said.
Charlotte, N.C.-based BofA, the nation’s largest bank, first warned about fourth-quarter trouble in November. On Wednesday the company said that a “continuing deterioration” in loan quality and other problems would cut quarterly earnings to a range of 85 cents to 90 cents a share. The firm had been expected to earn $1.17 a share.
The news sent the stock down $3.19 to $38, the lowest since 1996.
BofA might be a bit ahead of its competitors in feeling the pain from bad loans, said banking analyst Matt Snowling of Friedman, Billings, Ramsey in Arlington, Va.
BofA, he said, concentrates on small to mid-size firms, which can be more vulnerable to an economic downturn than corporate giants.
Before BofA dropped its bucket of ice water on Wall Street on Wednesday morning, financial stocks were rallying, continuing to bask in the glow of Federal Reserve Chairman Alan Greenspan’s strong hint Tuesday that the Fed might ease interest rates in 2001.
The immediate plunge in bank stocks “shows that although everyone generally benefits from lower interest rates, asset-quality concerns are on the forefront of people’s minds,” said analyst Joe Morford of Dain Rauscher Wessels in San Francisco.
Earnings warnings are coming from all industries, but Kalinowski said he expects the heaviest downgrades to be in the technology and retailing sectors.
In the case of retailers, consumers are “already paying more at the pump and for oil and natural gas, and they don’t have the wealth effect from the stock market helping them the way it did last Christmas,” he said.
After four quarters of 20%-plus growth, earnings of the blue-chip Standard & Poor’s 500 companies will grow just 8.1% this quarter, analysts estimate. The slowdown seems precipitous, Kalinowski said, “but it’s actually just a reversion to a normal trend” of profit growth in the high single digits.
Aside from the slowing economy, the wave of warnings probably is being fueled by the SEC’s new Regulation FD (for fair disclosure). The rule requires companies to disseminate as widely as possible any information that could have a material effect on their business and stock price.
The rule is meant to curtail the kind of “selective disclosure” that occurs when a company provides information to only a few analysts or money managers.
Charles Hill, chief of research at First Call/Thomson Financial, another research firm that compiles earnings data, said it is impossible to gauge precisely how much of the flood of pre-announcements stems from the economic environment and how much from Reg FD.
But one thing is clear, he said: If people thought the rule would shrink the flow of information by making company officials afraid to speak out, they were wrong. Firms, if anything, are erring on the side of spouting off, issuing releases announcing in advance that they are planning an announcement, he said.
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Withering Growth
Earnings of the blue-chip Standard & Poor’s 500 companies are expected to grow just 8.1% in the fourth quarter, according to analysts’ current projections.
Year-over-year profit growth for the S&P; 500
QI: 23.7%
QII: 22.7%
QIII: 17.5%
QIV: 4th quarter 2000 (estimated): +8.1%
Source: IBES International
