Outlook for Earnings Worsens as Company Warnings Rise

As pessimism about the economy deepens, profit estimates for large U.S. companies continue to fall “fast and furious� for the first quarter and 2001, according to earnings trackers.

Nor is the bleaker outlook confined to the United States: A report Wednesday from Merrill Lynch & Co. said a “global profits recession looks increasingly likely� this year.

Technology companies’ earnings have been hit hardest by analyst downgrades, but the outlook is deteriorating across a broad spectrum of industries, data show:

* Company “confessions� about weaker first-quarter results are coming at a record clip. “The pace is fast and furious,� said Joseph Kalinowski, equity strategist at earnings tracker IBES/ Thomson Financial. “And first-quarter confession season doesn’t even officially start for another month. I think this is just the beginning.�

So far this year, 303 companies have issued “negative guidance� for the first quarter, compared with 44 at the same time last year, Kalinowski said. Two-thirds of the firms warning so far are non-tech companies.

Overall, corporate confessions are on pace to top the record of 792 set during the fourth quarter of 2000, he said.

* Of 11 broad industry sectors in the blue-chip Standard & Poor’s 500 index, seven are expected to post earnings declines or just minuscule gains this quarter, compared with the first quarter of 2000, according to First Call/Thomson Financial.

* Corporate profit estimates for companies worldwide have continued to erode in February, said Richard Bernstein, a market strategist at Merrill Lynch in New York. Analysts’ earnings expectations have headed downward in aggregate for 12 of the 14 world regions that Merrill follows, he said.

Globally, the tech and telecom sectors have produced some of the highest-profile earnings disappointments of recent weeks, of course, as numerous companies have reported slumping sales. Not surprisingly, analysts’ earnings revisions in those sectors have become increasingly pessimistic.

Per-share operating earnings for tech companies in the S&P; 500 now are expected to drop 19% in the current quarter from a year earlier, and drop 16% in the second quarter. They aren’t expected to begin rising again, year-over-year, until the fourth quarter.

For the year overall, analysts now expect tech companies to post a 4% earnings decline from 2000, Kalinowski said. As of Dec. 31, analysts had expected an increase of about 11% this year.

Telecom companies’ earnings are expected to slide 12.6% in 2001, overall. At the end of last year, analysts had forecast just a 3.4% drop in 2001.

For tech and non-tech companies alike, higher energy costs are “a huge factor [for profits], at least for the first half of this year,� according to Joe Cooper, research manager at First Call/Thomson Financial.

He noted that earnings are expected to soar 50% in the first quarter for the S&P; 500 energy group--but fall 42% for the basic-materials group, in part because of higher oil and natural gas costs.

While S&P; 500 companies’ earnings as a whole are expected to decline 2.8% in the first quarter, that drop would be closer to 10% without the expected earnings gains at energy companies in the index, Cooper said.

One bright spot in the earnings outlook: Analysts’ estimates for small and mid-size companies have held up far better than those for bigger companies.

Profits are expected to grow 15% this year for companies in the S&P; mid-cap 400 index, and 32% for the S&P; small-cap 600 companies, versus only 5% for the S&P; 500.

Kalinowski said he recently highlighted the contrast by looking at the IBES semiconductor group of 160 stocks. He found that although the sector’s earnings this year were projected to fall 11% overall, they would rise 14% if the five largest stocks--Intel, Texas Instruments, Applied Materials, Applied Micro Circuits and Micron Technology--were removed.

Still, all estimates remain in flux, analysts caution. Expectations still are high that a profit rebound will begin in the second half of 2001.

“They’re still holding out hope for later in the year, reluctant to take their expectations down,� Cooper said of many analysts.

But he said he wouldn’t be surprised to see those numbers shift dramatically in coming months.

“If history holds course, the analysts are still behind the ball� in trimming estimates, he said.

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Fading Hopes

Here’s how analysts’ consensus estimate of the first-quarter change in blue-chip technology companies’ operating earnings have shifted since Oct 1. of last year:

*

Expected Q1 2001 tech earnings growth

Now: -19%

Source: Securities Data/Thomson Financial