Profits tumble in first quarter
Bloomberg News
NEW YORK — U.S. corporations' quarterly profits fell the most in 10 years as consumers and businesses cut spending and the economy slowed. Many investors and analysts forecast a drop in annual earnings as well.
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"There will be very few signs of recovery in the second half," said Henry Cavanna, who helps oversee $608 billion at J.P. Morgan Fleming Asset Management. "This economic slowdown will be protracted."
UAL Corp., the parent company of United Airlines, reported larger first-quarter losses than Wall Street analysts had anticipated.
First-quarter earnings fell 4.8 percent, based on the 414 companies in the Standard & Poor's 500 Index that had reported as of last week. The quarterly profit decline is one of just four in the past decade, and the biggest since an 18 percent plummet in 1991's third quarter, according to First Call/Thomson Financial.
Cisco Systems Inc., JDS Uniphase Corp. and Motorola Inc. cut thousands of jobs and said profits fell short of forecasts as sales slowed. Eight of the 10 biggest airlines, including the owners of American Airlines and United Airlines, had losses.
Oil companies were the exception. Exxon Mobil Corp. and rivals benefited as natural gas prices more than doubled and refining profit almost tripled because of higher gasoline prices.
Wall Street analysts have grown more pessimistic in the past two quarters. They now expect profits to fall 11 percent in the second quarter and 2.3 percent in the third. For the year, they project a 2.9 percent decline.
"We see more earnings pressure to come," said Stephen Roach, chief economist at Morgan Stanley Dean Witter & Co., one of the few economists predicting a recession.
The U.S. economy grew at a 2 percent annual rate in the quarter, less than half as fast as the average of the past four years. Unemployment in April rose to 4.5 percent, the highest in years, as companies fired workers to reduce costs. Consumer spending, which accounts for two-thirds of gross domestic product, rose 3.1 percent in the quarter, matching the second-lowest gain since June 1997.
Some investors, however, say earnings will rebound by year-end or early 2002.
Falling interest rates and President George W. Bush's tax-cut plan will give earnings a boost, said Hersh Cohen, who manages the $5 billion Smith Barney Appreciation Fund.
And there are some signs of the economy's resilience. Sales of existing homes rose in March to an annual rate of 5.44 million, more than analysts forecast. Some companies also said the slowdown hasn't hurt profits. General Electric Co., the biggest U.S. company by market value, said first-quarter earnings rose 16 percent and forecast profit growth of at least 10 percent annually.
Still, more companies are telling investors that second-quarter earnings will fall short of forecasts, said Charles Hill, research director at First Call. About 70 companies in the S&P 500 have advised investors and analysts to cut estimates, compared with 43 companies at the same point in the first quarter, he said.
"The second-quarter warnings are coming in at a staggering rate," Hill said. He added that more companies have told investors that earnings will disappoint than at any time since First Call began to track estimates in the early 1990s.
It isn't until at least the fourth quarter or next year that analysts expect earnings to recover. Analysts forecast 9.4 percent profit growth in the fourth quarter and 18.4 percent in 2002, according to First Call.
