Warnings Help Cushion Blow of Profit Drops in 4th Quarter
Confirming how far and fast the economy has fallen, fourth-quarter profits for companies in the Standard & Poor’s 500 index so far are running 3.1% below the year-earlier numbers, according to earnings-tracker First Call/Thomson Financial.
With fewer than one-third of major companies reporting their results through Friday--and another wave of reports due this week--the year-over-year profit decline is a stunning reversal for corporate America. S&P; 500 companies’ earnings had risen roughly 20% in the first quarter of 2000, 15% in the second and 10% in the third.
Though a surge in earnings at energy companies--most of which have yet to report--is likely to lift the final fourth-quarter results, the overall profit change for S&P; 500 companies will be close to zero, some analysts say.
Yet the stock market last week finished broadly higher for a second straight week, largely ignoring the dismal profit data.
In part, that’s because companies issued such a barrage of earnings warnings last month that investors were prepared for the weak official numbers when they arrived, experts say.
What’s more, many investors apparently believe that the economy, and profits, will rebound in the second half of the year as the Federal Reserve Board’s new credit-easing policy begins to take effect.
“The stock market is telling you it has priced in two sloppy quarters” for the start of 2001, with economic growth of between 1% and minus-1% and with quarterly profit declines of around 5%, said New York money manager James D. Awad of Awad & Associates.
December’s earnings pre-announcement, or “confession,” season was the busiest and one of the bleakest on record, said Joseph Kalinowski, strategist at IBES International, another firm that tracks analysts’ forecasts and corporate earnings reports.
There were a record 1,286 pre-announcements, of which 687 were negative forecasts or warnings, 256 were positive and 343 were neutral, Kalinowski said.
The previous record confession season was in the fourth quarter of 1998, after the Russian bond default and Asian financial crisis, when 1,064 firms issued pre-announcements, 554 of them negative, he said.
As analysts cut earnings estimates in the fourth quarter to reflect the economic slowdown, they effectively lowered the bar for many companies. As usual, actual results are mostly beating those reduced expectations: 50% of the S&P; 500 firms reporting earnings so far have managed to exceed analysts’ lowered estimates, according to IBES and First Call. Another 17% of firms have fallen short of expectations and the remaining 33% have matched forecasts.
By industry sector, makers of “consumer durables”--big-ticket items such as appliances--are beating analysts’ consensus expectations by about 3% so far, Kalinowski said.
On the downside, technology firms so far are falling 6% short of estimates. Financial-services firms also are trailing expectations, as banks contend with credit problems and brokerages see commissions and trading profits slide.
But investors also have been encouraged by relatively upbeat reports last week from firms such as IBM, Microsoft, Harley-Davidson and Washington Mutual.
IBM sparked a wave of enthusiasm in the computer sector Wednesday by announcing a 28% fourth-quarter profit gain and--more important--standing by its previous estimates for 2001 revenue.
IBM’s refusal to back away from sales-growth forecasts in the high single digits helped power its stock to a 15% surge Thursday and Friday.
Microsoft followed that act Thursday by matching analysts’ reduced expectations for profit in the latest quarter. The software giant was cautious about the quarter ahead, but it stuck by earlier forecasts for its full fiscal year ending in June--which signaled to many investors that the worst may be over. Microsoft shares rose nearly 10% Friday.
Tech firms that were more guarded--Sun Microsystems, for example--got punished in the market. Sun slid 11% on Nasdaq on Friday after trimming its sales forecast for the first half of the year.
Harley-Davidson beat First Call’s estimates for fourth-quarter profit with a 26% year-over-year gain.
The motorcycle maker also boosted production targets for this year, saying demand is still outpacing supply.
It was an impressive showing for a consumer-durables firm. As a whole, the group has been sagging along with the economy.
Harley-Davidson’s rosy forecast contrasted sharply with that of General Motors. The auto maker’s fourth-quarter sales and profit tumbled, and it predicted that industrywide U.S. sales would drop as much as 10% in 2001.
For Washington Mutual, the nation’s largest savings and loan, strong demand for home loans and checking accounts helped push fourth-quarter profit 10% above year-earlier results. The Seattle-based S&L; also said it would raise its dividend by a penny a share, boosting investor confidence in its outlook.
Still, Kalinowski worries that investors overall may be counting too heavily on a second-half rebound in earnings.
In just the last week, analysts have slashed their full-year profit-growth estimate for firms in the Nasdaq 100 index--mainly tech giants--to 7.5% from 15%.
For the S&P; 500, the trim was more modest, to 7.8% growth from 8.6%, Kalinowski said.
Charles Lemonides, chief investment officer of M&R; Capital Management in New York, said he wouldn’t put much faith in company forecasts looking more than a month or two ahead.
“Last July, people weren’t telling you things were going to be this skinny in January,” Lemonides said. “They didn’t help me see this one coming, so how much stock should I put in what they say now?”
Meanwhile, Lemonides and other analysts said the Securities and Exchange Commission’s new Regulation FD, intended to give all investors equal and simultaneous access to important corporate news, has had a noticeable effect in its first full earnings season.
For one thing, “whisper numbers”--those unofficial earnings estimates that companies used to share with favored analysts--have all but disappeared, Lemonides said.
According to Awad, Regulation FD results in investors getting less news, faster. Fearful of being held accountable for flawed forecasts, companies are being more conservative about what they say.
“The SEC is satisfied and Wall Street is frustrated,” Awad said, adding, “I’m not so sure the SEC is upset about Wall Street’s frustration.”
The new rule may be partly responsible for the record number of fourth-quarter earnings pre-announcements and the fact that a larger-than-usual number of firms are meeting forecasts right on the nose, analysts said.
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* EARNINGS AHEAD
A preview of companies expected to report this week. C2
