Markets & Stocks
Stocks could get hit
September 15, 2001: 9:20 a.m. ET

Airlines, insurers likely to sell off in short term, but defense issues may zoom
By Staff Writer Parija Bhatnagar
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NEW YORK (CNNfn) - Rescue and cleanup work continued Saturday as the United States continued efforts to recover from the worst terrorist attack in history. Meanwhile the market outlook dimmed following attack-related earnings warnings from several high-profile companies and building cash-flow pressure on airlines and insurers.

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"In terms of macro sector trends and macro market trends, there's a very good chance that the market will see some kind of a downward move, but of what magnitude, we're not prepared to say," said Brian Belski, market strategist with U.S. Bancorp Piper Jaffray.

"But we do think that employing that panicky investment strategy, scrapping your existing strategy and buying all defensive names is not the way to go. Stay focused with your existing disciplines and not stray from those," Belski said. The stock market has been closed since Tuesday's terrorist attacks. Monday's opening bell will follow the longest suspension of trading since the Great Depression.

Automaker Ford Motor Co. (F: Research, Estimates) said late Friday disturbances in transportation following last Tuesday's attack in New York and Washington has hampered delivery of components forcing it to cut its third quarter car production by 110,000 to 120,000 vehicles.

"As a result, third quarter results now will fall short of our previous forecast for earnings of 10 cents per share before one-time items," Ford warned in a statement.

Ford's warning was followed by General Electric (GE: Research, Estimates) which said its Employers Reinsurance Corp., its insurance business arm was facing $600 million in claims before tax or $400 million after tax, cutting GE's third quarter forecast by four cents a share to 33 cents per share.

Delta Air Lines (DAL: Research, Estimates), the nation's third largest airline said the attacks could have a material adverse impact on its financial condition or results of operations.

Sectors to watch

Airlines: Boeing (BA: Research, Estimates), $34.36; UAL Corp. (UAL: Research, Estimates), $30.82; AMR Corp. (AMR: Research, Estimates), $29.70; Continental Airlines (CAL: Research, Estimates), $39.64; US Airways (U: Research, Estimates), $78.44; Northwest Airlines (NWAC: Research, Estimates), $19.62.

Sector analysts fear that an industry shutdown in the wake of Tuesday's attacks is enough to wreck havoc on an already depressed sector and bring many carriers to the brink of bankruptcy.

Airlines have been struggling with severe revenue shortage from a steep drop in demand for air travel.

"The sector has been pretty terrible up to this point, even without the industry shutdown. So what has happened now is like piling on to an industry that was already down. Barring sharp gains in the overall market, and if the markets goes down, then the airlines may well be down more than the overall market on a percentage basis," said John Pincavage, president of Pincavage and Associates.

Insurance: AIG (AIG: Research, Estimates), $74.26; Chubb (CB: Research, Estimates), $66.47; Allianz (AZ: Research, Estimates), $23.79; Hartford (HIG: Research, Estimates), $61.91; Berkshire Hathaway (BRK.A: Research, Estimates), $68,000.

Insurance companies are bracing to cope with what is being termed as the worst disaster in insurance history, with insurance claims from the World Trade Center attack likely to reach an astounding $30 billion.

"This is the sector which is most directly impacted from property casualty, coverage and liability. Some of the estimates are up to $10 billion-to-$20 billion for some of the largest companies. I suspect earnings will suffer at least in the near term. However, having said that, I don't believe there is panic in these companies," said Howard Carver, Insurance analyst with Ernst & Young.

Defense and Aerospace: Northrop Grumman (NOC: Research, Estimates), $81.94; Raytheon (RTN: Research, Estimates), $24.85, EDO (EDO: Research, Estimates), $20; DRS Technologies (DRS: Research, Estimates), $25.15; Boeing (BA: unchanged at $43.46, Research, Estimates), $43.46.

The defense sector is expected to benefit in the short term as investors bet on the possibility of a U.S. military retaliation to the assaults.

"From the aerospace sector, we expect the companies that have heavy commercial exposure, in particular relating to the civil airliner business, will experience some weakness due to the expected slowdown in air travel in the next six to nine months.

The flip side is that many of the same companies are also heavily involved in the defense sector, which we expect to experience additional plus ups and accelerated production orders from various parts of the defense industry over the next several months," said Peter Arment, vice president, JSA Research.

Integrated Oil: Amerada Hess (AHC: Research, Estimates), $76.92; Conoco (COC.A: Research, Estimates), $30.60; Kerr-McGee, $59.70; Exxon-Mobil (XOM: Research, Estimates), $41.24; Philip Petroleum (P: Research, Estimates), $55.53; Chevron (CHV: Research, Estimates), $91.70; Royal Dutch Petroleum (RD: Research, Estimates), $53.87.

As the market look for its investing tone next week, market strategists are betting that investors will make a heavy play for defensive areas within the market, such as oil and energy stocks. "I expect the integrated oil sector to help support the market if it goes down.

Aside from the fact that oil prices are expected to be volatile, a lot of these major oil companies are big defensive plays. I expect to see a move into the integrated oil companies stocks throughout the course of next week going forward," said Bruce Lanni, oil analyst with A.G. Edwards.

"When investors start to look for safe havens to put money into, they'll look to energy. Domestic integrated oil companies will do really well. Most likely, the companies that will get a bigger push are the more diverse International integrated oil companies like Exxon-Mobil. That sector is probably going to outperform the market, irrespective of what the market does," Lanni said.

Consumer Staples/Retail: Procter & Gamble (PG: Research, Estimates), $74.20; Gillette (G: Research, Estimates), $31.20; Coca-Cola (KO: Research, Estimates), $49.95; Colgate-Palmolive (CL: Research, Estimates), $57.26; Duane Reade (DRD: Research, Estimates), $35.61; Wal-Mart (WMT: Research, Estimates), $46.23; CostCo (COST: Research, Estimates), $34.17; Kroger (KR: Research, Estimates), $27.05; CVS (CVS: Research, Estimates), $36.24.

Consumer cyclicals are another defensive area investors will be looking at because they don't necessarily have a one-for-one correlation with market risks or marker reactions, according to market strategists.

"Consumer staples outperformed the overall markets in Europe, and I would assume that would be the case here as well. You've got to eat, you've got to take your prescription drugs. I would really be looking at Kroeger, Wal-Mart and CVS," said Deborah Weinswig, sector analyst with Bear Stearns.

"Wal-Mart has three things going for them. They said that 51 percent of their total sales are sold at the supermarket. They offer low prices, which is what consumer will be looking for in a slowing economy. And the third thing is-- What is more American than Wal-Mart? The sentiment at the moment will be it's your patriotic duty to spend money. Kroger offers the lowest prices of the big three retailers Albertson's (ABS: Research, Estimates), Kroger and Safeway (SWY: Research, Estimates)," Weinswig said.

Other stocks to watch Monday

Cisco (CSCO: Research, Estimates), $14.47. The tech bellwether set a stock buyback of $3 billion over the next two years in a bid to bolster investor confidence in its sagging stock.

Oracle (ORCL: Research, Estimates), $11.46. The software provider edged Wall Street earnings estimates in its first fiscal quarter, posting a slight gain in profit despite slightly lower revenue.

Hewlett-Packard (HWP: Research, Estimates), $17.89. The computer maker has started talking to the European Commission about its planned purchase of Compaq Computer Corp. even before making a formal filing.  graphic

- from staff and wire reports. Prices based on Sept.10 close