U.S. Corporate Profit Rebound Loses Steam

By Thomas Black - Oct 10, 2011 6:12 PM GMT+0700

This year’s rebound in corporate earnings is losing steam as slower economic growth and greater strain on consumers threaten sales and profit margins at companies from Texas Instruments Inc. (TXN) to Google Inc. (GOOG)

Earnings per share for the Standard & Poor’s 500, excluding financial companies, rose 14 percent in the third quarter, the smallest gain since the end of 2009, analysts’ estimates compiled by Bloomberg show. That compares with 19 percent in the second quarter and 20 percent in the first. Analysts have begun reducing forecasts for the current quarter and beyond. S&P 500 futures rose today, indicating the index will extend last week’s rally.

Chipmaker Texas Instruments and air conditioner maker Ingersoll Rand Plc are among companies that have lowered their guidance because of faltering demand. With U.S. unemployment stuck above 9 percent, political squabbling about the government debt ceiling and a downgrade of the nation’s credit rating, confidence has been sapped, said Matt McCormick, who helps manage $4 billion with Bahl & Gaynor Inc. in Cincinnati.

“What started in August as a crisis of confidence hasn’t been resolved,” McCormick said. “This is a grind-it-out economy. We’re in a situation where it’s still going to take several years to rebuild our economic house.”

S&P 500 earnings excluding financials are forecast to slow to 12 percent growth in the fourth quarter and 9 percent in the first quarter. The U.S. economy will expand 1.6 percent this year after growing 3 percent in 2010, according to the average of 66 economist forecasts. Consumer spending slowed in August to 0.2 percent as incomes dropped for the first time since October 2009, and the Bloomberg Consumer Comfort Index showed the worst quarterly performance in more than two years.

Global Equities

Global equities have lost about $6 trillion in value since Aug. 5, when S&P stripped the U.S. of its top AAA credit rating. The S&P 500 tumbled 14 percent in the three months ended in September, the Stoxx Europe 600 Index fell 17 percent, while the MSCI Asia Pacific Index plunged 16 percent, their biggest quarterly drops since the peak of the financial crisis in 2008.

Alcoa Inc. (AA), the biggest U.S. aluminum producer, will report earnings Oct. 11 after U.S. markets close, the first member of the Dow Jones Industrial Average to do so for the third quarter. While aluminum has declined from 2011 peaks, average prices rose in the past year, helping drive profit to what analysts say will be 23 cents a share, from 9 cents a year earlier.

Low-Grade Recession

“Good corporate earnings or surprisingly better-than- expected earnings would really be a win in this market, which seems to be selling at a level that has at least built in a low- grade recession,” said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion.

Existing earnings estimates may not provide much use to investors, said Gary Flam, who helps manage $6.5 billion for Bel Air Investment Advisors LLC in Los Angeles. Expectations for S&P 500 earnings growth had been ratcheted down from 16 percent at the end of July, making it easier for companies to meet or beat estimates even as demand cools, Flam said.

‘Heightened Uncertainty’

As of Oct. 7, 174 companies had lowered third-quarter earnings outlooks among the 436 that had provided guidance for the period, according to data compiled by Bloomberg. At least 59 had raised, with the remainder primarily standing pat. More than looking at this past quarters’ earnings, investors want companies to give them a peek into the future, Flam said.

“In a time of heightened uncertainty, people are trying to get some clarity and conviction and that’s going to come from what management is saying about the outlook,” Flam said. “It’s not necessarily what you did in the third quarter. It’s what does the future hold.”

Texas Instruments, the largest producer of analog chips for medical devices and e-book readers, lowered the top range of its third-quarter earnings forecast to 60 cents a share from 65 cents on Sept. 8. Sami Kiriaki, who runs the Dallas-based company’s power-management unit, later cited a slowdown “across many products, many markets and many customers.”

Intel Corp. (INTC), whose processors run more than 80 percent of the world’s personal computers, may also have suffered last quarter as consumers pushed off laptop purchases or turned to alternative devices such as Apple Inc. (AAPL)’s iPad.

“We’re seeing weak demand across so many market segments,” said Chris Caso, a New York-based analyst for Susquehanna International Group. He has a “neutral” rating on Intel’s stock and said he doesn’t own any of the shares.

Euro-Area Economy

Flagging U.S. purchases of air conditioners, golf carts and security systems forced Swords, Ireland-based company Ingersoll Rand to reduce the top range of its earnings forecast for the third quarter by 15 cents to 80 cents and its sales outlook by $200 million to $3.95 billion.

The euro-area economy has also lost momentum with growth in the 17-nation bloc slowing to 0.2 percent in the second quarter from 0.8 percent in the first. Earnings per share for Stoxx Europe 600 companies are projected to have gained 5.8 percent in the third quarter from a year earlier, the slowest pace since 2009 and down from an average 18 percent increase in the second quarter.

Royal Philips Electronics NV, the Amsterdam-based maker of lighting equipment and consumer electronics, may say net income slumped to 84 million euros ($112 million) from 524 million euros when it reports Oct. 17. Sales likely slipped to 5.4 billion euros from 6.16 billion euros, the survey of analysts showed.

Siemens, Lufthansa

Munich-based Siemens AG (SIE), Europe’s largest engineering company and a Philips competitor, has said that growth will come down in the second half as industrial customers cut back.

Airlines Deutsche Lufthansa AG (LHA) in Germany and Finnair Oyj (FIA1S) in Finland cut their profit forecasts in the past month as results fell short of expectations and forward bookings sagged. U.K.-based Flybe Group Plc (FLYB), Europe’s biggest regional airline, said Oct. 5 that first-half revenue missed its forecast.

In the U.S., United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL) have said they are worried that travel demand may weaken at the end of this year and leading into 2012 if the economy worsens, and they’re trimming capacity to lower costs.

European leaders have been meeting to discuss ways to fortify undercapitalized banks and stem sovereign-debt woes, which broke out in Greece in late 2009. U.S. President Barack Obama last week called the European debt crisis “the biggest headwind” to his nation’s economic recovery.

Greece, Portugal

In response to the debt crisis, spending cuts have been pursued in Greece, Portugal and Ireland, damping economic outlooks. In the U.K., Tesco Plc (TSCO) reported its worst domestic sales performance in at least six years. Children’s retailer Mothercare Plc (MTC) and Premier Foods Plc (PFD), the U.K.’s largest foodmaker, have said they would miss forecasts.

The three biggest luxury carmakers -- Daimler AG (DAI)’s Mercedes-Benz, Bayerische Motoren Werke AG (BMW) and Volkswagen AG (VOW)’s Audi -- are reporting a cooling in sales growth after a first- half boom that has nudged them toward all-time sales highs.

Fiat SpA (F), Italy’s largest automaker and the owner of Chrysler Group LLC, has scrapped its 2011 domestic car sales forecast, with Chief Executive Officer Sergio Marchionne saying last month that the “Italian market hasn’t been so weak since the 1980s.”

Financial Companies

Financial companies may be a drag on earnings growth as well because the market for initial public offerings has dried up, acquisition activity has slowed and fixed income has been hurt by low yields, said Luschini of Janney Montgomery. Analysts’ forecasts for S&P 500 earnings-per-share growth that includes financials have dropped to 12 percent this month from 18 percent in July, according to Bloomberg data.

Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and other banks that rely on trading and investment-banking may report lower earnings compared with the second quarter because deal volume fell and investors fled riskier assets to protect against Europe’s debt crisis and the specter of another U.S. recession. Jefferies Group Inc. (JEF), which last month said fiscal third-quarter fixed-income trading plunged 85 percent from the second quarter, called August “outright brutal.”

“European concerns have extended beyond the periphery,” driving down trading profits, Guy Moszkowski, an analyst in New York with Bank of America Corp. (BAC), said in a Sept. 26 note.

Companies with mortgage-banking units may fair better as efforts by the Federal Reserve to keep borrowing costs low prompt more lending, Richard Ramsden, an analyst at Goldman Sachs in New York, said in a Sept. 28 note. Wells Fargo & Co. (WFC), the biggest U.S. home lender, may post adjusted earnings per share of 72 cents on Oct. 17, compared with 70 cents in the second quarter, according to the average of estimates.

GE Earnings

General Electric Co. (GE) should post an earnings rise of 2 cents a share to 31 cents, led by higher profit at the Fairfield, Connecticut-based company’s finance unit.

The economy still is expanding and profit margins are still benefiting from cost reductions, said Tobias Levkovich, chief U.S. equity strategist for Citigroup Inc. in New York.

“We’re looking at an uneven patch of growth,” Levkovich said. “I don’t expect to see really bad earnings here.”

McDonald’s, Toyota

As the economy slows, investors are seeking companies that sell basic goods and pay high dividends, said McCormick of Bahl & Gaynor. Oak Brook, Illinois-based McDonald’s Corp. (MCD) benefits when consumers turn to restaurants that can save them money, he said. The world’s largest restaurant chain is forecast to report earnings per share of $1.42 in the quarter, up from $1.29 a year ago.

Toyota Motor Corp. (7203), Asia’s largest carmaker, may boost profit as it ramps up production that was disrupted by Japan’s March earthquake. The company may report net income of about 103 billion yen ($1.3 billion) in the quarter ended Sept. 30, compared with 98.7 billion yen a year earlier.

“Toyota has rebounded from the quake, and what will be important for the carmaker now is to keep up with demand,” said Issei Takahashi, a Credit Suisse Securities Japan Ltd. analyst.

Samsung Electronics Co., the world’s second-largest maker of mobile phones, is counting on its Galaxy mobile devices with Google’s Android operating system to boost revenue as profit from its chips and flat-screen panels falls. The Suwon, South Korea-based company, Apple’s closest competitor in smartphones, gave preliminary results on Oct. 7 that showed operating profit in the three months ended in September fell to 4.2 trillion won ($3.6 billion), down from 4.86 trillion won a year earlier. Full results will be reported later this month.

Microsoft, Google

Apple, whose founder Steve Jobs died Oct. 5, is defying the consumer slowdown with higher sales of iPhones and iPads. The Cupertino, California-based company’s adjusted earnings per share for its most recent fiscal quarter is forecast to jump to $7.23 from $4.64 a year earlier, analysts’ estimates show.

Microsoft Corp. (MSFT) sales are projected by analysts to rise 7 percent to $17.3 billion, as corporate purchases of Office software and server programs make up for weaker consumer demand for personal computers.

While Google is benefiting from gains in the search-engine market, the industry is showing signs of a slowdown. Spending on U.S. search advertising rose 7 percent in the third quarter, down from 12 percent growth in the second quarter, according to IgnitionOne Inc., an online marketing company.

‘Consumer Strain’

“The data shows consumer strain in response to perceived weaker economic conditions,” Jordan Rohan, an analyst at Stifel Nicolaus & Co. in New York, said in an Oct. 5 research note in which he downgraded Google to “hold” from “buy.”

Analysts project Google to have third-quarter earnings minus some items of $8.76, up 15 percent from the $7.64 reported a year earlier. Fourth-quarter earnings should also rise 15 percent to $10.07. That’s a slowdown from 36 percent growth in the second quarter and 20 percent in the first.

With demand slowing, earnings this quarter will give investors a good idea which companies are better equipped to face a downturn, McCormick of Bahl & Gaynor said.

“When you look at what has happened since August --whether it be the debt negotiations, the downgrade, the continued mess in Europe and the volatility -- it’s logical to conclude that that will have an impact on economic activity and earnings,” McCormick of Bahl & Gaynor said. “I think you’re going to see stronger companies begin to separate themselves from their weaker competitors.”

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Kevin Miller at kmiller@bloomberg.net