War fears get blame for weak profits - But there are lots of other reasons for first-quarter shortfalls
www.msnbc.com By John W. Schoen MSNBC
March 10 — If, like most investors, you’re hoping for a strong rebound in corporate profits this quarter, it looks like you’ll have to wait at least another three months. Of the more than 700 companies that have already tipped their hand by “pre-announcing” profits, some 57 percent came up short of expectations. CEOs have a lot of things to blame this quarter on, from high energy prices to an unusually cold winter. But expect “war worries” to be the most popular excuse. CORPORATE hand-wringing about the possibility of war has sent Wall Street slashing earnings estimates sharply. At the beginning of the year, for example, analysts at Standard & Poor’s were expecting year-over-year profit gains of roughly 15 percent for the companies that make up the S&P 500. As of last week, that number had been pared to 9 percent. Uncertainties about war have also scared both consumers and businesses into cutting spending, and that slowdown will clearly have an impact on corporate America’s bottom line. But analysts expect to hear “war worries” cited a lot this quarter — regardless of the real underlying problem. “What happened after 9/11?” said Chris Wolfe, an equity strategist at J.P. Morgan. “Everyone blamed that, and you had a pass well into 2002. Now, it’s shifted to war with Iraq. If I don’t hear this 100 times on conference calls this quarter, I’ll be surprised.” The trick for investors will be to sort out which companies have been legitimately hurt by war uncertainties and which ones are using it to hide other problems. One of the clearest cases will be profit reports from companies that use a lot of oil. Oil prices have shot up this quarter as cold weather raised demand and war worries stoked concerns about supplies. “If your business is impacted by oil prices then Iraq is a legitimate excuse,” said Phil Dow, and equity strategist at RBC Dain Raucher. “But if it’s not, maybe it’s a hiding place. Falling forecasts Profit forecasts having been moving lower since the beginning of the year. (Oper. profit year-over-year growth) Sector as of Jan.1 as of Feb.1 as of Mar. 7 Financials 7% 5% 4% Technology 16% 15% 15% Health Care 8% 6% 6% Consumer Cycl 13% 15% 10% Industrials 2% -6% -9% Consumer Stpls 6% 3% 2% Energy 90% 106% 143% Comm Services 10% 3% 1% Materials 58% 33% 5% Utilities -16% -19% -28% Transports 99% -77% -93% S&P500 Total 11.7% 8.8% 7.3% SOURCE:Thomson Financial/First Call Manufacturing companies — including chemical companies that use oil as a raw material — have been most directly affected. Food processors and retailers, transportation companies and utilities have all seen their fuel bills skyrocket, potentially leaving a big hole in the bottom line.
Playing now: • Blue chips slide again • OPEC keeps quotas in check • ImClone founder fined $800,000 While some companies have been able to pass these costs in the form of a surcharge, others will be stuck with a big, unexpected fuel bill. RETAIL STILL WEAK, DESPITE DUCT TAPE War worries may have helped boost sales of duct tape and plastic sheeting, but retailers have already begun warning that sales have been weaker than expected. But war may have little to do with a consumer’s decision to skip the trip to the mall. In many parts of the country, a bitter cold winter — complete with repeat snow storms — kept consumers home. And rising layoffs — begun long before the world approached the brink of war — isn’t helping either, according to Sam Stovall at Standard & Poor’s. “It’s eroding consumer confidence, and the focus is on not really spending a lot of money,” he said. “People are saying, ‘I’m worried about my job; I won’t be spending the money I thought I might maybe on discretionary items.” Businesses are also still tight-fisted with their budgets for new equipment — in part due to uncertainty about the prospect of war. But Wolfe thinks war fears are only only part of the reason businesses are hunkering down. “Companies have been paying down debt, buying back stock, and increasing dividends,” he said. “Until we have much more balance-sheet healing, I think the idea of an immediate flipover to reinvesting the company for growth — when we already have excess capacity — is just way, way early.”
About the only sector that you won’t hear blaming lower profits on war is the oil sector, where the rise in oil prices has helped fuel a sharp rise in profits. Analysts surveyed by Thomson Financial/First Call are looking for industry profits to jump 143 percent in the first quarter compared to last year. Some analysts argue that the profit shortfall just means a rebound will be delayed until later in the year. But most concede the outlook for the second quarter depends a lot on what happens to energy prices. The big concern is that any major interruption in oil production would cause crude prices to move even higher than current inflated levels. But barring any major destruction of oil production in the region, Saudi Arabia has pledged to make up any shortfall from Iraq or other oil producers. “They’re putting a lot into storage right now,” said Ed Silliere, a trader at Energy Merchant Corp. “They’ve got some 15 million barrels in storage in Saudi Arabia waiting to move onto the market if, in fact, we have a war. They’ve got some 20 million barrels reportedly somewhere in the Caribbean waiting to hit the market if this occurs. So if we do see a war, I’m not sure you’re going to see a big spike unless something really strange happens.” Still, it’s unlikely oil prices will fall sharply as they did following the outbreak of the Gulf War in 1991. That’s because the recent run-up in prices was driven by more than war worries. A two-month shutdown of production in Venezuela cut into crude oil supplies while and this winter’s bitter cold weather stoked demand for heating oil and natural gas. Analysts say it could be months before supply shortages are eased — war or no war. Get the latest earnings news • Nokia warns on sales • Kroger reports higher earnings • Heinz quarterly earnings lower • Deutsche Telekom posts huge loss • Bristol-Myers restates earnings