In an environment in which companies are issuing 50% more negative profit warnings than they were last quarter, the select few firms actually meeting estimates or raising guidance suddenly seem all the more remarkable.
Among the players that have successfully weathered the difficult U.S. economy in the third quarter are
Black & Decker
Gruff but Lovable
Rite Aid, the nation's third-largest drugstore chain, said it expects third-quarter EBITDA of $120 million to $130 million, up from $77.5 million a year ago. It also raised guidance for 2003, as cost controls and higher sales of prescription drugs helped the firm outperform other retailers such as
, which recently warned of disappointing September sales.
Tenet, the No. 2 U.S. hospital operator, said late Monday that it expects earnings to beat Wall Street estimates as a result of higher hospital admissions and cost cuts. The company also said its debt repurchases and refinancing led to lower interest costs.
Meanwhile, power-tools maker Black & Decker said it is optimistic about the third quarter and the full year, because of solid order levels in most of its businesses. The firm said its Price Pfister plumbing products will lose shelf space at
, but it nonetheless expects to meet or exceed analysts' estimates.
And Teco Energy, the integrated utility firm, projected that 2002 net income would grow between 10% and 15% over last year, despite the general economic downturn. It also said earnings per share would fall a few cents above or below its 2002 target of $2.35. Analysts surveyed by Thomson Financial/First Call are calling for $2.31 a share.
Chuck Hill, director of research at First Call, said companies issuing upbeat guidance have been scattered across a number of industries, and that even firms within the same sector have reported vastly different results. Still, he added that much of the strength so far has come from the consumer cyclical group, companies such as automakers and retailers and particularly the homebuilders. Indeed,
both reported higher-than-expected third-quarter earnings last week and raised full-year guidance.
The Engine of Growth
Consumer cyclicals are the only names that have seen earnings estimates go up for the third quarter, according to Hill. Analysts are now expecting to see 21% growth from this sector, up from 17% at the start of April 1. But Hill noted that revisions have come down a touch for the fourth quarter, with analysts now looking for 32% growth instead of the 33% that was expected on April 1.
Marc Gerstein, director of investment research at Multex, said that the energy sector has seen the most upward earnings revisions over the past month, with almost 34% of the companies in his database revising their numbers higher. That's not too surprising given that crude oil prices have jumped 51% this year amid concerns about a war with Iraq.
Gerstein added that close to 20% of the consumer cyclical firms in his database have raised guidance in the last four weeks, while almost 15% of the transportation firms and 14% of basic materials companies have increased their numbers. Just 11.1% of finance companies and 10% of health care firms have raised guidance, and a mere 7.6% of technology firms have done so, according to his calculations.
The third-quarter preannouncement season has been brutal so far, with the ratio of negative to positive warnings rising significantly from the same point in the second quarter. Just 212 companies have issued upbeat assessments of their business, compared with 311 in the second quarter, according to Thomson Financial/First Call. Moreover, 466 companies have issued negative warnings compared with 367 in the previous three-month period.
"Despite a moderate economic recovery, corporate America is still reporting earnings disappointments," said Morgan Stanley economist Richard Berner. "To be sure, earnings expectations may still be too high. More fundamentally, however, excess capacity in some key industries is limiting the gains, and slowing global growth is a barrier to margin improvement."
Berner said U.S. profits are leveraged to global growth, with 20% of S&P earnings coming from abroad. But the global economy is tepid at best, and the strength of the dollar is still a factor restraining those earnings, he said.
Although the confessional season has been disappointing this quarter, the number of positive preannouncements is still far above the level seen last year. During the same period in 2001, negative warnings outstripped positive ones by more than 3 to 1. But as First Call's Hill points out, the economy was "in the depths of a recession" back then.