The earnings recovery is still on track – but barely.
While the economic recovery was supposed to have lifted the profits boat by now, companies are struggling mightily to meet their earnings estimates, and many are falling off the charts.
“I’m surprised by the breadth and the depth of the warnings,” said Chuck Hill, director of research at data and research firm Thomson First Call.
“Virtually every sector has had serious warnings, and many of them have been significant shortfalls this quarter,” he said of third-quarter earnings.
Last week was awash with news from companies across the board warning they won’t make their earnings for this quarter.
Big cigarette maker Philip Morris, giant pharmaceutical maker Wyeth, third-largest air carrier Delta Air Lines, telecom SBC Communications Inc., home-improvement chain Lowe’s Cos., and huge brokerages Lehman Brothers and Morgan Stanley were just a few household names that had to telegraph failing earnings for this quarter.
Companies make earnings pre-announcements at the end of the quarter to signal to investors and Wall Street what company management is expecting for their earnings.
The companies do this before they officially announce earnings during the full confessional period at the beginning of each quarter, known as earnings season.
Earnings season for the third quarter begins in earnest in mid-October.
As the third quarter draws to a close today, a more painful picture of dismal profits emerges.
The ratio of negative pre-announcements to positive pre-announcements has jumped to 2.2, the highest since the worst part of the recession four quarters ago. That means for every company making a positive earnings pre-announcement for the quarter, there are 2.2 other companies with negative pre-announcements, according to Thomson First Call data.
With 950 companies reporting, 496 – or 52 percent – have warned they won’t make earnings expectations. Meanwhile, 230 companies, or 24 percent, say they will meet expectations; and 224 companies, or 24 percent, say they’ll beat analysts’ expectations.
Data wonks at Thomson have ratcheted down their own estimates more than 50 percent from the optimistic 16.6 percent earnings growth they originally foresaw in July, at the beginning of the third quarter, to 7.3 percent at the end of the quarter.
And research director Hill expects the final number for earnings growth – or how much companies earn per share – to come in at a meager 2 percent.
Last quarter was the first in six to show companies increasing earnings. But the second-quarter growth barely eked out 1.2 percent over significantly easier comparisons. “We’re still in for a lot of bad news on the earnings front,” Hill warned.
What’s keeping company profits at bay is the stumbling economic recovery and caution caused by the saber-rattling with Iraq.
“You have a populace that will not accept raised prices [for goods], and the winds of war blowing over Iraq are keeping both consumers and companies from spending,” said Bryan Piskorowski, market commentator for Prudential Securities.
Mixed bag
Though the earnings recession has ended, some sectors have yet to see profits rise. Here are analyst expectations for earnings in the quarter ending Sept. 30 versus the year-ago quarter.
Winners
Technology +35 percent
Financial services +29 percent
Consumer cyclicals, retailers, restaurants +24 percent
Losers
Energy -23 percent
Utilities -17 percent
Communications -15 percent
Source: Thomson First Call