Corporate earnings hopes could be inflated
| • | Earnings may have hit peak |
By Rachel Beck
Associated Press
NEW YORK — Corporate earnings are improving, all right. How much may be another issue.
With the third-quarter earnings season getting into full swing, expectations are for good news to abound as the weak dollar, continued productivity improvements and some pickup in business contribute to better results. Analysts' forecasts are higher than they've been in almost a year and investors have pushed up stocks in anticipation of big profit gains.
But digging into what's behind the numbers might tell a slightly different story. It's not that earnings suddenly look terrible — just that the expected surge might not really be as strong as it looks.
That's because the earnings outlook — for the overall market and individual stock sectors — may be getting inflated by huge anticipated improvement at a handful of companies.
Consider the impact that Lucent Technologies is having on earnings forecasts. A year ago, the troubled telecommunications company lost 84 cents a share in the third quarter. This year, thanks to massive cost-cutting and staff reductions, it's expected to lose just 4 cents a share.
Now factor that into the expectations for the Standard & Poor's 500 stock index. Analysts are estimating earnings growth to climb by 16.2 percent in the quarter, the best since the fourth quarter of last year, according to Thomson First Call. But remove Lucent's anticipated showing, and those estimates shrink to 12.8 percent.
The same goes for the tech sector. Include Lucent, and earnings are forecast to climb 77 percent. Take Lucent out, and growth may only come in around 20 percent, according to Thomson First Call.
That's part of the reason Merrill Lynch economist Ron Wexler reminded clients in a recent report that individual stock selection is very important in the current market. Even if a sector is expected to report strong earnings gains, not every company within the sector may fare well.
Take the S&P 500's energy sector, where earnings are expected to rise about 41 percent from a year ago. Only about 83 percent of those companies are expected to show positive year-over-year results, which means 17 percent will likely do worse than last year, Wexler said.
This differential is more extreme in the tech sector. Wexler found that only 67 percent of tech companies are expected to report improved earnings from the third quarter of 2002, leaving 33 percent to actually report weaker earnings. And that's the same proportion of companies as found in sectors with far less expected growth, such as consumer staples, which includes food distributors and household product manufacturers.
