Profit Preview Offers Some Hope for Larger Companies
Second-quarter corporate earnings “confession” season has begun, and it already looks ugly. But the tally of companies warning about weaker-than-expected results actually may offer a glimmer of hope, analysts say.
Amid a still-weak economy, the number of companies warning so far--320--is on a record pace, according to earnings tracker Thomson Financial. At this point in the first quarter, there were 257 confessions about that period’s results.
But the bad news this quarter is mostly coming from small and mid-size companies, said Joseph S. Kalinowski, U.S. equity strategist at Thomson Financial.
The combined market capitalization of companies warning about results represents 13.6% of the entire universe of companies, versus 17.4% at this point in the first quarter, Kalinowski said. That indicates that smaller firms--which have less impact on major stock indexes--are dominating the list of firms forecasting profit shortfalls.
“I’m optimistic,” Kalinowski said. “Things look gloomy, but if you go behind the numbers they may not be so bad. We may have seen the worst” for profit weakness at major companies.
Of course, it also could be that many larger firms don’t yet have a good handle on this quarter’s results, with about half the quarter gone. And owners of small- and mid-sized stocks may not take much comfort if the greatest profit weakness now is centered in their companies.
What’s more, this is still likely to be a brutal quarter for earnings: Analysts’ aggregate forecasts are for an 11.4% decline in operating earnings for Standard & Poor’s 500-index companies versus a year ago.
Nonetheless, there was some good news in the first-quarter profit totals, Kalinowski said.
Thomson Financial expects average earnings to decline 6.5% from a year earlier for the blue-chip S&P; 500 companies.
But of the 453 S&P; companies reporting first-quarter results so far, the average firm has beaten analysts’ estimates by 4%, Kalinowski said. And of the Nasdaq 100 companies--the biggest technology firms--the average firm beat estimates by 12.9%.
Of course, in many cases companies were beating extremely depressed estimates, and many firms still reported results far below year-earlier profit.
Still, “it may be that companies overshot with their downward guidance” in the first quarter, Kalinowski said.
The stock market’s healthy bounce over the last month lends credence to that idea, he said.
This quarter is expected to be the bottom for the earnings crunch: Analysts’ average estimates for S&P; 500 companies show they expect a 2.8% drop in third-quarter earnings and a gain of 8.9% for the fourth quarter.
But those numbers remain in flux, Kalinowski said, in the uncertain economy.
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Fading Potential?
Shares of EntreMed slumped Monday amid new investor concerns that the company’s anti-cancer drugs won’t be effective.
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EntreMed shares, weekly closes and latest on Nasdaq
Monday: $15.30, down $3.95
Source: Bloomberg News
