As the market heads into one of the peak weeks for corporate preannouncements, investors may be comforted to hear that the recently completed fiscal first quarter is likely to be one of the most benign confessional periods in more than a year.
Out of 814 preannouncements released so far, 393 have been negative, 245 have been positive and 176 have been in line with expectations, according to Thomson Financial/First Call.
Both the total number and the number of negative warnings are down significantly from the average levels seen in each of the past four quarters. In the first quarter of last year, 995 companies had provided guidance by now, with 694 of them predicting an earnings shortfall.
On Monday alone, more than 30 companies across a broad range of industries provided some kind of earnings or financial guidance, including
Bausch & Lomb
Federated Department Stores
. As should probably be expected, the guidance was mixed.
Joseph Kalinowski, an analyst at Thomson Financial/First Call, said the guidance ratio, or the number of negative announcements divided by the number of positive outlooks, has historically been pressured during the period leading up to the actual earnings reports as the bad news outweighs the good.
"However, it has been our belief that the first quarter, like the fourth quarter, will buck this negative trend," he said, adding that the latest quarter should prove to be one of the most favorable preannouncement seasons since the implementation of Regulation FD in October 2000.
The current guidance ratio stands at 1.60, which is lower than at any other comparable period after Reg FD and below the average of 3.18 for all other quarters since the disclosure rule was implemented, Kalinowski said. (A number under one would imply more positive than negative surprises.)
The technology sector is also seeing signs of healing. Tech still accounts for about 30% of all the earnings shortfalls hitting Wall Street, but total preannouncements have come down to about 244 from 368 a year ago. For every positive earnings forecast in tech land this year, there are just two negative warnings. In the first quarter of last year, each positive announcement was met with eight negative ones.
"Although estimates have room to come down further, the rate of deterioration has slowed significantly," Kalinowski said.
Charles White, a portfolio manager at Avatar Investors, said many companies have set the bar of expectations extremely low, enabling them to meet or beat analysts' estimates. He also noted that the better-than-expected economic backdrop has set the stage for fewer disappointments.
Tom McManus, equity portfolio strategist at Banc of America Securities, agrees that the earnings situation is getting better, but he believes the improvement in preannouncements might be overstated. Earnings are being artificially inflated by an accounting change that eliminates the amortization of goodwill, he said, estimating that this should boost profits by about 5% this year.
"Because of this change, companies may not have a good handle on their numbers," he said.
McManus said the number of negative warnings dropped in the third quarter of 2000 as the new fair disclosure rule went into effect. Although investors took this as a sign that the tide was turning for corporate profits, it actually proved to be a temporary blip as companies simply became more comfortable with the new policy. The new accounting rules could be having a similar effect, he said.
So far, only about 27 members of the
have reported earnings for the first quarter, and it's too early to draw meaningful conclusions about the results.
Jumping for Joy
Still, Thomson Financial/First Call is projecting a year-over-year earnings decline of about 12%, assuming that current estimates don't change materially and that actual results beat the final estimates by the normal 3%.
According to Thomson, consumer staples, health care and financials all are expected to post the strongest earnings this quarter. Consumer staples should see growth of 15%, while health care earnings should increase 10%, and financial companies' profits should climb 6%. Transportation, energy and technology will probably show the worst returns, with declines of 262%, 62% and 25%, respectively.
As usual, investors will be focused on any guidance companies provide for the second quarter and beyond.
"It's going to be hard for a lot of companies to say second-half guidance is going up," McManus said. "But I think people would be jumping for joy just to see companies issue guarded confidence and to hear that the current estimates can be met."
McManus is expecting incremental improvement in profits later in the year as comparisons get easier, but he believes estimates are still far too high. Meanwhile, valuations remain a nagging concern.
"Earnings were falling at an alarming rate and now it appears things aren't getting any worse, but there's a lot of ground to cover," said Avatar's White. "The market wants a sense that the sustainability of earnings is here."