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More earnings surprises?
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December 18, 1997: 1:54 p.m. ET
Expert warns that Asian trouble may bring more disappointments like 3M's
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NEW YORK (CNNfn) - When research and manufacturing giant 3M announced Wednesday that quarterly earnings would be unexpectedly low, it blamed sustain weakness in Asian markets for the slump.
Ed Keon, vice president of I/B/E/S, a service that tracks corporate earnings estimates, told CNNfn anchor Stuart Varney that the Asian crisis will continue to produce negative earning surprises like 3M's. Excerpts of his remarks on "Business Day" follow:
VARNEY: Would it be fair to say that there are a great many more negative earnings surprises waiting to unfold?
KEON: Yes. There are many companies like 3M (MMM), which gets more than half of its business from outside the United States. There are many other companies that get that much or 30 to 40 percent of their business overseas. Because of the strong dollar, all those companies are going to be vulnerable to more negative earnings news. [146Kb WAV] [146Kb AIF]
VARNEY: They're all vulnerable to this? There's a lot of companies who export and depend on 30 percent of their earnings overseas.
KEON: Yes. Because the dollar has been strong all over the world with the exception of Europe, but especially in the three biggest countries that we export to - Japan, Mexico and Canada -- you're going to have vulnerability for this.
VARNEY: Up until about a few months ago, most analysts were forecasting a 12 to 14 percent gain in overall profits for 1998. By how much have you scaled back that forecast?
KEON: I cut that in half, if not maybe even a little more. I think we're looking at maybe 6 to 8 percent earnings growth for next year.
VARNEY: That's way below the earnings growth that we've been seeing in each of the last three to five years.
KEON: You know, it's interesting. It is way below what we've seen in the last five years or so, but it is about equal to the long-term earnings growth over the last 50 or 60 years. So, it looks bad by recent history, but over the long term it's about average.
VARNEY: Is there any bright spark in this, any good side? Are there are any groups of companies or industries which will show more profit because of what's happened in Asia?
KEON: This is an example where it's going to take company-by-company analysis, even more than usual. For example, if a company imports a lot of raw materials or components from Asia, they'll benefit tremendously. So, if they are importing components and selling them in the United States, their profits could soar next year.
VARNEY: What if it there is some kind of solution to the Asian crisis? Say the IMF comes in, restores the various economies, and there's a rebound for Asian currencies and stocks. Would you change your earnings forecast again?
KEON: It may help a little, but it's going to take a while for these problems to work out. So, I think we're looking at the latter part of 1998 for that rosy scenario to be successful, and into 1999.
VARNEY: And that's if you get this rosy scenario at all?
KEON: I think that's correct.
VARNEY: What about industries which don't do a great deal of business overseas, but which would be subject to intense competition from much cheaper imports?
KEON: That's a very good point. Even auto parts, steel, other industries which compete with Asian countries for business in the United States and also in Europe will be hurt by the weaker dollar in those parts of the world.
VARNEY: OK. Let's move away from the Asian problem for just a moment. Oil prices have sharply declined over the last few weeks, with the Brent dropping to $17-$18 a barrel recently. Is there any group of companies which benefit from that kind of move?
KEON: Yes. Consumers of energy -- the airlines in particular. UAL (UAL) announced they're going to do much better than expected. The trucking sector is going to do very well. Those sectors will have their earnings equity doubled from what they were at the same period last year.
VARNEY: And you're raised your earnings estimates for all of those groups of companies?
KEON: That's right.
VARNEY: Fair enough. It's not all negative then. 
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