Another day, another takedown in the Old Economy. Friday it was soap-and-canned-ham purveyor
As was the case
Tuesday, a leading consumer-goods company cited rising commodity prices, among other factors, for a sharp earnings setback. Once again, some observers wondered whether the company wasn't using high-profile macroeconomic worries to deflect attention from its own missteps. And once more, investors steadfastly ignored that possibility as they merrily punished the entire sector, sending leading consumer-good stocks down by 7% to 23%.
Now the attention turns to who's next. In the wake of the high-profile blowup of
Procter & Gamble
both have denied they'll experience any earnings shortfalls. But their stocks have plunged more than 20% apiece this week as investors have fled the sector for the "safer" ground promised by high-tech shares.
The lesson? Check the math that companies and analysts are using to support their projections, and be prepared for more turbulence.
"There's no question that this group is under enormous pressure," says William Steele, consumer products analyst with underwriter
Banc of America Securities
. Steele downgraded Dial to market performer from buy in the wake of the news, which sent the stock down 3 5/16, or 23%, to 10 15/16.
That said, not everyone was shocked by Dial's shortfall. On Thursday, analyst Wendy Nicholson with underwriter
Salomon Smith Barney
cut her price target to 20 from 27, citing P&G's announcement, along with Dial's dependence on petroleum byproducts and Latin American operations. Nicholson maintained her outperform rating after the announcement.
"I didn't see P&G coming, but Dial wasn't hard to see," Steele says, adding that the consumer-products group should show 11% to 12% annual earnings growth, which may be a few points below investors' expectations.
Under that thinking, Clorox could be next, by some calculations.
analyst Sally Dessloch on Friday downgraded Clorox to long-term buy from buy, citing earnings worried spurred by rivals' shortfalls and Clorox's dependence on raw materials. J.P. Morgan has underwritten for Dial but not for Clorox.
"I wouldn't be surprised to see a softening in their expectations," says Kevin Grant, analyst at
Harris Associates LP
, which holds Dial and Clorox shares.
Others, using the same reasoning, see Colgate as vulnerable. But Banc of America's Steele disagrees. Although 26% of Colgate's sales come from Latin America, 70% of its business is in oral care, in which Colgate has few rivals. "If you look at their portfolio, the largest component is oral care, and there is no major global competitor to that," says Steele. Banc of America hasn't underwritten for Colgate.
For its part, Clorox says it "remains confident in the consensus estimates that the Street has for earnings for the third quarter and for the full fiscal year."
"We appreciate that petroleum and resin prices are up, but frankly, the resin costs were already factored into our forecast," a spokesman says. "Therefore we didn't have any optimism in our forecast that we need to revise at this point."
That brings up one last point: skepticism, both about what companies and analysts say and about the market's reaction, can help investors see the picture more clearly. "We actually don't care what the companies say and what analysts think," says Nicholas Gerber, portfolio manager with
Ameristock Mutual Funds
, which owns Procter & Gamble shares but doesn't own Dial. "That's why for us, Dial wasn't such a surprise."
And in a stock-market era of high-tech easy money and Old Economy shabbiness, "you have to look at the way the business is performing, not the way the stocks are performing," says Grant. "You'd think these companies are going bankrupt."