Corporate warnings bode ill for earnings

December 10th, 20114:56 am @


Fri Dec 9, 2011 11:15pm EST

NEW YORK (Reuters) – On top of euro zone debt troubles, Wall Street now has to worry about sagging sales from Europe as a recession in the region seems more likely.

Warnings from companies such as chemical maker DuPont (DD.N) and chip maker Texas Instruments (TXN.N) suggest the crisis may already be taking its toll on corporate America.

While holiday shopping has started on an upbeat note, the corporate warnings could sour the cheer for some investors.

“We are now beginning to see the collateral damage of the events in Europe with the earnings guidance cuts,” wrote Peter Boockvar, equity strategist at Miller Tabak Co. in New York.

Fourth – and first-quarter earnings growth estimates for Standard Poor’s 500 companies have come down sharply since July, underscoring worries about the outlook for companies.

Earnings are now expected to increase 10.1 percent for the fourth quarter, down from a growth estimate of 15 percent at the start of October and from an estimate of 17.6 percent in July, according to Thomson Reuters data.

The data also showed that negative preannouncements by companies are outpacing positive ones by the biggest ratio since the second quarter of 2001.

Late Thursday, Texas Instruments cut its revenue outlook for the current quarter, citing lower demand, while DuPont on Friday lowered its full-year profit forecast.

Overseas, German specialty chemicals group Wacker Chemie (WCHG.DE) also cut its outlook, with the industry worried about slower global growth.

Among others in technology, Lattice Semiconductor Corp (LSCC.O) cut its fourth-quarter revenue outlook on Friday.

Stocks mostly brushed off the bearish news on earnings, focusing instead on Europe after nearly all European Union leaders agreed to build a closer fiscal union to battle the sovereign debt crisis.

But the market for months has struggled with the news from Europe, which featured the lack of resolution to the debt crisis, causing high uncertainty for investors.

“Today was a positive move forward. Unfortunately European austerity will impact global corporate earnings going into the next year,” said Chad Morganlander, portfolio manager at Stifel, Nicolaus Co in Florham Park, New Jersey.

“European policymakers’ inability to placate investor fears has business decision-makers hesitant to give positive light to the coming months,” he said.

Stocks ended with gains for a second straight week, and the profit warnings came on the heels of what has been considered a fairly robust third-quarter reporting period.

For the week, the Dow rose 1.4 percent, the SP gained 0.9 percent and the Nasdaq was up 0.8 percent.

Earnings increased 17.9 percent for the third quarter, according to Thomson Reuters data, up from a forecast for 13.1 percent growth in early October.

Prospects for profit and revenue growth have been among the chief reasons why a good number of analysts remain optimistic about stocks heading into 2012.

Kenneth Fisher, a billionaire investor and author whose money management firm oversees $40 billion in assets, said 2012 “will be a very nice year” for the United States.

“Revenue growth, as a function of the economy, is pretty damn gangbusters,” he said at the Reuters 2012 Investment Outlook Summit this week.


Still, the aggregate change in consensus earnings estimates has been coming down even over the past month, according to Thomson Reuters StarMine data. All but two SP 500 sectors — healthcare and consumer staples — show negative earnings revisions to estimates over the past 30 days, the data showed.

Materials and financials are among sectors showing the biggest drops in estimates.

For the fourth quarter, earnings for the materials sector are now expected to have decreased 1.4 percent from a year ago, while in October earnings were expected to have risen 25.6 percent.

Financials, seen as the sector most sensitive to euro zone problems, also have taken a hit. Sector earnings are expected to have increased 18.3 percent for the fourth quarter, down from an October 3 forecast for growth of 26.6 percent.

SP 500 revenue is expected to have increased 6.6 percent in the fourth quarter compared with revenue growth of 11.1 percent in the third quarter, Thomson Reuters data showed.

“A lot of companies are talking about Europe,” and its effect going forward, said Greg Harrison, Thomson Reuters earnings research analyst. Also, lackluster trading volumes are going to affect financials here in the United States, he said.

Companies seemed more optimistic heading into 2011. Consumer confidence was higher, and the crisis in Europe seemed more contained.

Among companies with disappointing outlooks a year ago were Xilinx (XLNX.O) and Jo-Ann Stores, which forecast a weak 2011 profit on Dec 1, 2010 but was bought by a private equity firm in January.

(Reporting by Caroline Valetkevitch; Additional reporting by Ernest Scheyder and Nicola Leske; Editing by Kenneth Barry)

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