The expected slowdown in corporate earnings growth is upon us, but it’s hardly time to hang crepe in the boardrooms.
Fourth-quarter earnings from continuing operations by companies in the Standard & Poor’s 500 stock index rose 11 percent last year over the fourth-quarter of 1994. That’s down from a 17 percent year-over-year gain in the third quarter and a 23 percent gain in the second quarter.
This is a process of returning to earth that may upset short-sighted stockholders. But it’s little comfort to employees whose incomes and living standards barely are staying even. And it is unlikely to quell the growing populist rhetoric among Republican as well as Democratic politicians about corporate greed.
Chicago-based Zacks Investment Service, which compiles corporate earnings estimates by stock analysts, says Wall Street expects first-quarter earnings by the S&P 500 to show a 7.8 percent increase over the first quarter of 1995–a figure much more in line with historic norms.
For all of 1996, analysts are looking for 12 percent growth in earnings, down from 17.6 percent in 1995.
Toting up the fourth-quarter earnings of the Tribune’s Top 100 list of major public companies, the gain for the latest quarter was 13 percent, to $6.6 billion from $5.8 billion a year earlier. That’s less than half the 30 percent year-over-year gain in the third quarter.
The ability of companies to boost the bottom line reflects conscious cost-cutting as well as improved sales. There is no sign that the cost-cutting is diminishing, and despite the weak Christmas season, consumers have not put a lock on their wallets.
As a result, predictions by some analysts that corporate profits will decline during part of this year probably are misplaced. If the economy slips into a recession, the Federal Reserve Board likely will cut short-term interest rates again. Lower rates almost automatically mean higher corporate profits.
On the other hand, the stock market lives on expectations, and normal profitability may not be good enough. Aside from a few pleasant surprises at such major companies as International Business Machines, Caterpillar and Chrysler, the latest batch of quarterly earnings announcements were nothing to write home about.
Half of the reports received by Zacks showed results that were at or below Wall Street estimates. For the previous 10 quarters, the reported figures were notably above analyst estimates.
From the standpoint of beating the forecasts, “This was the weakest quarter in a couple of years,” said Benjamin Zacks, executive vice president of Zacks.
“We’re going to see more disappointments for a while until the analysts get their forecasts down to where reality is,” Zacks said. “We’re just embarking on that phase.”
In addition, many investors are beginning to question the quality of reported earnings. Over the past several years, companies have become remarkably creative in the art of the so-called one-time charges to earnings that seem to be covering more and more ordinary costs of doing business.
Biting the bullet with a hefty reduction in net worth to cover extraordinary events, often called a corporate “restructuring,” seems to be a conservative accounting procedure. But as one-time charges proliferate in scope and multiply in frequency, they may distort the ebb and flow of income and expenses to the point that investors and analysts cannot understand where the business has been or where it is heading.
Anyone who follows financial news knows what happens to a stock when the company’s earnings fail, even by a few cents a share, to live up to estimates. The share prices hit a downdraft that can last for days or weeks.
Despite a rebound in technology stocks, Motorola’s stock barely has recovered from the drubbing it took in early January, when its fourth-quarter financial statements disappointed Wall Street.
If investors, in addition to feeling this kind of whiplash, lose confidence in the financial figures they are given, the effect on stock prices could be devastating.
Nevertheless, companies used to touting double-digit earnings growth may find it tempting to use gimmicks to keep up the pace.
Among the Top 100 companies, those with especially strong fourth-quarter results included John Nuveen, a marketer of tax-exempt investments that posted a 61 percent gain in profits. Allstate Insurance, which seems to have blossomed since its spinoff from Sears, Roebuck, posted a 53 percent gain after a 142 percent increase in the third quarter.
On the downside, Quaker Oats continues to be struggle upstream against the tide of Snapple. And Inland Steel’s profits are suffering under the widespread pressure on steel prices.
No room for the weekly “dumb question” from readers this time. But in the belief that there is no such thing as a dumb question when it comes to understanding the financial markets, write to me at 435 N. Michigan Ave., Chicago, Ill. 60611. My phone number is 312-222-3599. My e-mail address is WEBarnhart@aol.com.
