3rd-Quarter Doldrums May Linger
Shell-shocked investors, already hit by a series of profit warnings from major U.S. companies in recent weeks, should brace for more bad news to come, analysts said.
When much of corporate America reports third-quarter results over the next month, the main focus is likely to be the outlook for profitability in the fourth quarter and into 2001.
Much of the bad news for the third quarter is already out, but there probably are more shocks in the offing as some companies come clean about prospects down the road. They are facing potential blows from three main sources: increasing signs the U.S. economy is slowing down, the low euro and high energy costs.
“The risk of earnings being much lower than expected in the fourth quarter and 2001 has gone up considerably,” said Chuck Hill, director of research at First Call/Thomson Financial.
Illustrating the problem, Dell (ticker symbol: DELL) the world’s No. 2 personal computer maker, warned this week that fourth-quarter per-share earnings could be as much as 7% below estimates. Dell said it remains on track to meet profit expectations for the third quarter, but also said third-quarter sales were coming in about 3% below what it had expected.
Other profit and revenue warnings have come from such widely held stocks as Intel (INTC), Apple (AAPL), Xerox (XRX) and Eastman Kodak (EK).
“Basically the fourth quarter comes down to a continued economic slowdown and the effect of currency, which we don’t know yet. . . . If the economy continues to exhibit signs of slowdown, we are going to have more earnings disappointments,” said Larry Rice, chief investment officer at Josephthal Lyon Ross.
Little more than a month ago, investors and analysts were expressing confidence the economy was heading for a soft landing. But the impact of the weak euro and the higher oil prices on U.S. company fortunes had increased the risks of a rougher ride.
First Call said Wall Street analysts’ consensus estimates are for S&P; 500 companies to post average profit growth of 15.4% in the fourth quarter, against 16.0% projected for the third quarter. S&P; company earnings growth was 23.7% on average in the first quarter and 22% in the second quarter.
Forecasts for the fourth quarter are likely to be cut further over the next few weeks, said Hill. There is a risk the consensus profit growth forecast could drop as low as 10%, he warned.
Joseph Kalinowski, equity strategist at earnings tracker I/B/E/S, said the picture could brighten if the euro stabilizes and oil begins to head lower as major oil producing nations boost production.
Some of the increased earnings warnings may be because of impending fair-disclosure regulations Oct. 23, some analysts said. Those regulations will prevent companies from privately guiding analysts to change their estimates without making public announcements and many companies are already changing policy to meet the new rules.
“The new move to limit disclosure is going to create a lot more volatility in the market . . . a lot more surprises both positive and negative,” Josephthal’s Rice said.
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Oil Slide
Crude oil prices fell Thursday, the day after the federal government released 30 million barrels of oil from the national reserves. At one point, the price dipped to $30.19, the lowest since Aug. 9.
Source: Bloomberg News
