NEW YORK (CNNfn) - The Grim Reaper has arrived on Wall Street.|
Like a never-ending funeral procession, company after company, big and small, tech and non-tech, has issued a warning in recent weeks that it likely won't be able to live up to the earnings expectations Wall Street had been counting on for the fourth quarter, and in some cases for next year.
On today's list: National Semiconductor Corp., which warned that its fiscal third-quarter results will fall short of estimates because of inventory buildups at its customers and weakness in the PC market. Also on the docket: Motorola Corp. and IDC, which both scaled back sales expectations; and after the closing bell, chip maker Intel, which warned that its fourth-quarter revenue forecasts won't make the grade. Just yesterday, Apple Computer Inc.; and last week, Gateway Inc. issued its warning.
Some of the companies blame unexpected spending on research and development, spending that hasn't yet translated into the returns they were counting on. Others blame unexpected costs, such as higher wages for employees and higher interest rates on outstanding debts.
But almost all of them blame their anticipated profit shortfalls on Federal Reserve Chairman Alan Greenspan and the six interest rate increases he implemented to slow the pace of the U.S. economy -- rate increases that have stunted the growth more than expected and scared consumers and businesses into high-tailing it back into the bear cave, cash in hand.
"The underlying premise of why we're seeing all of these warnings is a slowing economic cycle," said Joe Cooper, a research analyst with earnings tracker First Call/Thomson Financial, which polls analysts for their profit expectations of companies and then averages them out. "The analysts didn't foresee that growth would slow down as much as they thought."
Warnings on the rise
To date, some 277 companies have issued some form of profit or revenue warning for the fourth quarter ending Dec. 30, according to numbers compiled by Boston-based First Call. That's almost 50 percent higher than the 188 companies that issued warnings a year ago. Companies typically begin reporting their fourth-quarter earnings in late January.
While not all are blaming Greenspan and the economy for their woes, many are gazing up at their stockpiled shelves and poring through their order books and concluding that, with less than three weeks to go before year end, sales are not going to add up to what they thought.
Take the personal computer sector. Not only has the gyrating stock market and rising interest rates deflated consumers' penchant to spend money on a new machine for the holidays, demand for new computers with anything higher than a Pentium III processor has waned dramatically, leaving a lot of inventory sitting on warehouse shelves.
Number of companies that have issued warnings in 4Q 2000: 277
Number of companies that issued warnings in 4Q 1999: 188
"Inventories still need to be worked off and demand that was highly anticipated in the final months of the year has just not appeared at the levels that people were expecting," said Tim Mahon, an analyst with Credit Suisse First Boston. "It's a kind of steamrolling effect."
And there's software, too -- the lack of a "killer app," as those in the business like to say. Unlike two years ago when Microsoft's Windows 98 spurred millions of consumers and businesses to upgrade their computer systems, no widespread standard software application -- an application that few can live without -- has hit the shelves, leaving little reason to buy.
"Everyone thought Windows millennium would be the driver and it just hasn't happened," Mahon said. "There is no reason on corporate side to go out and do upgrades and there is no reason at home to dress up or replace a computer that surfs the 'Net just fine the way it is."
Yes Virginia, technology is cyclical
Merrill Lynch Global Technology analyst Steven Milunovich agreed, pointing out to CNNfn that people are beginning to realize that the technology sector as a whole is cyclical and not immune to the ups and downs that other industries suffer when the economy cools off. (423KB WAV) (423KB AIFF)
And that's just on the technology and PC side. Other sectors including telecommunications, consumer cyclicals, advertising, retail and manufacturing, among others, are all suddenly facing the reality that sales will not be as strong in the final months of the year as they had thought, prompting a growing roster of them to fess up to Wall Street ASAP.
"These companies are having a tough time following through with the kind of sales projections they had forecast only months ago," First Call's Cooper said. "No one, including the analysts themselves, had predicted such a significant and all-encompassing slowdown, and there's a lot more to come."
That means watching companies such as Procter & Gamble Co. (PG: Research, Estimates), Gap Inc. (GPS: Research, Estimates), Home Depot (HD: Research, Estimates), Wal-Mart Stores Inc. (WMT: Research, Estimates) and many other well-known American companies that depend on consumers' fat wallets to boost their balance sheets to determine whether they issue warnings as well.
"Through 2001 profit gains are expected to continue slowing, but get back to more sustainable levels," Cooper said. "People are viewing this as terrible that growth is slowing, but that's going on the assumption that high double-digit growth is normal."
According to Cooper's projections, the average percentage increase in quarterly profit for the S&P 500 group of companies is expected to ring in at around 9 percent for the first and second quarter of next year. While that's starkly below the 21 percent and 19 percent gain recorded in the first and second quarter of 1999, "its still above average," Cooper said.
The Regulation FD effect
To be sure, there are other factors that may be making things worse than they seem. For one, Regulation FD, or Fair Disclosure, which was officially implemented by the Securities and Exchange Commission on Oct. 23. The law forces publicly traded companies to release information about themselves to the public at the same time, preventing companies from favoring selected Wall Street analysts with top financial news.
That, in part, is what has prompted the flurry of earnings warnings, Cooper said. National Semi, for instance, opted to unveil its scaled-back fourth-quarter projections in its third-quarter results, released earlier today. "The only company that ever repeatedly did that was Intel," Cooper said.
In Focus: Tech Trouble
And an expected easing in interest rates from the Federal Reserve early next year could help make the grim profit picture a little rosier as companies get a break on the amount of interest they have to pay on outstanding loans and find it cheaper to borrow capital to invest in infrastructure.
It is widely expected that the Fed will ease its inflation-fighting stance at its Dec. 19 meeting by shifting its assessment of economic conditions away from concerns about overheating and toward a more balanced view that would include acknowledging the possibility of excessive slowing in activity.
And the Fed is expected to at least discuss the possibility of lowering rates early next year -- and probably move on that effort in January. The implied yield on the fed funds futures contract that expires in February is now 6.23 percent, indicating investors are counting on at least a quarter-point rate cut before then. The fed funds rate is currently at 6.5 percent.
"All the same, a rate cut won't have any immediate effect on companies' profits," Cooper said. "These rate changes take six months to a year to be felt, which means it won't be until the second quarter of next year that the last interest rate hike makes its way through the economy. So it may look pretty bleak until then."