Despite Warnings, Earnings Expected to Be Good

Despite teeth-gnashing among market observers over the usual spate of negative “pre-announcements,” second-quarter corporate earnings overall are likely to be strong, says Charles Hill, research chief at earnings tracker First Call/Thomson Financial.

“I’d be very surprised if we see year-over-year growth below 22%” on average for companies in the blue-chip Standard & Poor’s 500 index, Hill said. “If you listen to everybody on CNBC lately, you’d think we’re headed for disaster. Well, profit growth could be down a bit from the first quarter, but things are pretty phenomenal considering where we are in the economic cycle.”

Pre-announcements, in which companies offer guidance about how they will fare when they report, have so far been less negative than normal, Hill said. About 52% of pre-announcements so far have been negative, versus 56% for all pre-announcements in 1999’s second quarter. The first quarter of this year was even better, with just 44% of pre-announcements negative.

Industry groups expected to show strong year-over-year profit growth include energy, expected to be up 117%, and technology, at 29%. Analysts’ estimates have been heading higher recently in both sectors.

Lehman Bros. (ticker symbol: LEH), meanwhile, provided a bullish preview for the brokerage group last week, reporting earnings per share of $2.78 for its quarter ended May 31, handily beating the First Call consensus of $2.49. Morgan Stanley Dean Witter (MWD) is expected to beat estimates as well when it reports this week.

Hill said potential trouble spots include the basic materials and capital goods sectors, despite projected year-over-year growth of 42% and 16%, respectively. “Those [estimates] have come down a bit [recently], and we’ve seen significant warnings from home furnishings and building supply companies” as the economy has slowed, Hill said. “That’s something of a caution flag.”

Companies in the paper, chemicals and metals businesses could disappoint, Hill said, because analysts may have gone too far in raising estimates, “overshooting” as the industries rebounded. Higher prices for raw materials are expected to weigh on chemical companies, for example, and the weaker economy in general may have hurt sales in other heavy-industry sectors.

Energy companies, meanwhile, are benefiting from easy comparisons to their year-earlier period, when oil prices were much lower.

Among tech companies, expectations are high for fiber-optics-related companies. Corning Inc. (GLW) shares have surged over the last week, hitting a record Monday, after the firm said it will far exceed analysts’ consensus estimate for the quarter.

Shares of computer maker Micron Electronics (MUEI) jumped 28% on Friday after a Lehman Bros. analyst raised his earnings estimates for this year and next, pointing to a deal with retailer Best Buy. Micron is expected today to report quarterly profit of 3 cents a share.