U.S. Stock Analysts Keep Estimates as Markets Fall (Update2)
By Michael Tsang
Oct. 13 (Bloomberg) -- The seizure in credit markets caused banks to stop lending to each other, sent U.S. stocks to the worst week in 75 years and prompted an unprecedented effort to cushion global economies. It failed to convince Wall Street analysts to change forecasts for record profits.
Alcoa Inc., the biggest U.S. aluminum producer, and Bank of America Corp., the second-largest U.S. bank, posted the steepest retreats in more than two decades last week after third-quarter profits missed predictions by 28 percent and 69 percent. For the fourth quarter, analysts say companies in the Standard & Poor's 500 Index will earn about $241 billion, the most ever.
``It's absolutely ridiculous,'' said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees $30 billion. ``Analysts are playing catch-up. It's crystal clear that you've got a weaker economy for several quarters. That's inescapable.''
Investors who are expecting a rebound after almost $7 trillion was erased from U.S. equity markets this year may be disappointed as earnings fail to match forecasts. S&P 500 companies that earned less than analysts estimated in the past year dropped 13 times more than the index's average decline, data compiled by Bespoke Investment Group LLC show.
Another 56 S&P 500 companies report this week after the index fell 23 percent over eight straight days of declines. The benchmark gauge's 39 percent retreat in 2008 would be the worst since 1937 as banks' losses on mortgage-related investments ballooned to more than $600 billion worldwide.
The S&P 500 jumped 5.5 percent to 948.96 as of 10:59 a.m. in New York today, after governments in the U.S., Europe and Asia agreed to support banks.
Treasury Secretary Henry Paulson already plans to buy stocks in financial companies and invest in distressed assets under the $700 billion program approved by Congress this month.
Democratic presidential nominee Barack Obama is gaining ground over Republican John McCain in polls ahead of next month's election as Americans become more focused on the financial crisis. The Democrat's edge, on average, is now more than 7 percentage points in national surveys, according to realclearpolitics.com. Polls have long shown that voters trust Obama more than McCain when it comes to handling the economy.
Operating profit at S&P 500 companies fell 7.5 percent last quarter and will jump 28 percent this quarter, led by banks and brokers, according to analysts' estimates compiled by Bloomberg. That would exceed the record $222 billion they earned in the April-June period last year.
Six of 10 industries will report record profits or come within 5 percent of all-time highs, according to Wall Street projections, which are usually based on company outlooks.
``The consensus will have to go down significantly,'' said John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which oversees $638 billion. ``The numbers are way too high.''
Any rebound may hinge on whether companies can overcome higher borrowing costs and a slowing economy to meet analyst forecasts that earnings will increase in the fourth quarter for the first time since April to June of 2007.
Credit dried up as banks' cost to borrow money for three months rose to 4.64 percentage points above what the U.S. Treasury paid last week, the most since Bloomberg began compiling the data in 1984. The difference more than tripled in the past month as Lehman Brothers Holdings Inc., once the fourth-largest U.S. investment bank, and Washington Mutual Inc., the biggest U.S. savings and loan, collapsed.
Coach Inc., the largest U.S. maker of luxury leather handbags, may report a record per-share profit of 77 cents in the last three months of the year, according to analysts.
That's after fiscal full-year profit rose at the slowest pace in nine years as consumers cut back on non-essential items and unemployment rose. The forecast is a 12 percent gain from the fourth quarter of 2007, when earnings at the New York-based company reached an all-time high.
Parker Hannifin Corp., the world's largest maker of hydraulic equipment, may earn as much as $1.43 a share this quarter, a gain of 16 percent, according to analysts' estimates. On average, they expect the Cleveland-based company's shares to rise 60 percent in the next 12 months. A government report this month showed orders to U.S. factories fell in August the most in almost two years, signaling business spending slowed even before the recent worsening of the credit crunch.
`What Do You Do?'
``Now that financing isn't available, what do you do?'' said Fort Washington's Sargen. ``You pare back on capital spending. You start thinking about laying off workers. That's what intensifies the recessions.''
New York-based Alcoa said last week third-quarter profit fell a more-than-estimated 52 percent and suspended its share buyback program to conserve cash. The stock fell 12 percent and 15 percent in the next two days.
Bank of America, located in Charlotte, North Carolina, last week said that third-quarter earnings fell 68 percent to $1.18 billion, or 15 cents a share. The result more than twice the decline analysts forecast, causing the stock to tumble 26 percent. Analysts still expect adjusted per-share earnings at the lender to increase almost sevenfold this quarter.
Discount to Book
Keith Horowitz, who covers Bank of America at Citigroup Inc., said after the earnings announcement that his forecast of 61 cents a share was too high because he didn't anticipate the speed of deterioration in the credit markets. The New York-based analyst still expects a more than 10-fold increase this quarter.
At banks, brokerages and insurers, which had a loss of $10 billion in the fourth quarter last year, analysts expect earnings of $58 billion this quarter. That's a more-than-fourfold jump from what analysts say financial firms earned last quarter.
Meanwhile, financial firms in the S&P 500 are trading at only 88 percent of their so-called book value, or assets minus liabilities. The discount indicates that shareholders expect more asset writedowns and credit losses, and that the companies would be worth more if they were liquidated and management fired.
Panicked investors and forced selling by funds has created buying opportunities in stocks that fell too far relative to earnings, said Stanley Nabi, who helps manage $9.6 billion at Silvercrest Asset Management Group in New York.
Forty percent of the decline during the 12-month bear market occurred in October. The sell-off pushed down valuations of S&P 500 companies to 12.03 times profit, based on earnings from continuing operations during the last four reported quarters, data compiled by Bloomberg show. That's the lowest since at least 1998. Based on estimated full-year earnings, the S&P 500 trades at 10.86 times, or 34 percent less than a year ago.
``Irrationality is all over the place,'' said Nabi, vice chairman of Silvercrest. ``We've gone to a point now where you can squeeze something so hard that there's nothing left to squeeze. I think we're darn close'' to the bottom, he said.
Even as companies have failed to meet analysts' expectations for four straight quarters, investors are punishing shares of those that have fallen short of estimates.
S&P 500 companies that have missed estimates in the past year have fallen an average 2.82 percent the day after announcing their results, versus a 0.22 percent daily decline for the index, according to Bespoke, the Harrison, New York-based research firm.
That may mean it's too early for investors to expect stocks to rally.
``If the numbers look bullish, I'd say people are overly optimistic,'' said Phil Orlando, New York-based chief equity strategist at Federated Investors Inc., which oversees $334 billion. ``You're going to have more conservative guidance from managements and more writedowns from some of the financials.''
To contact the reporter on this story: Michael Tsang in New York at firstname.lastname@example.org
Last Updated: October 13, 2008 11:02 EDT