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4Q warnings pile up
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December 16, 1998: 5:09 p.m. ET
Nearly one-third of Dow components have warned, but analysts still bullish
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NEW YORK (CNNfn) - Earnings season is still three weeks away, but already eight of the 30 multinational companies that constitute the Dow Jones industrial average are issuing fourth-quarter profit warnings to soften the expected blow.
Three more of the Dow components say they expect a quarterly revenue shortfall, and one, pharmaceutical giant Merck (MRK), revised downward its expectations for earnings next year.
The spate of negative news paints a less-than stellar picture of the nation's corporate health. But analysts maintain that most of those companies issuing warnings are well-positioned to weather the economic storms still brewing abroad.
And at least one analyst believes the Dow Jones industrial average is on a collision course to shatter records early next year.
David Alger, a mutual-fund manager for the Alger Fund, predicts yet another interest-rate drop by the Federal Reserve in January, which Alger believes will spark a rally in blue-chip stocks, driving the benchmark blue-chip index to the 10,000 mark in the first quarter of 1999.
Depending on the health of overseas economies, particularly Asia and Europe, Alger added U.S. companies could see an earnings turnaround by late next year.
How the mighty have fallen
So far, Sears (S), Union Carbide (UK), Caterpillar (CAT), Boeing Co. (BA), J.P. Morgan (JPM), Coca-Cola (KO), Chevron Corp. (CHV) and Minnesota Mining & Manufacturing (MMM) have issued profit warnings.
Blaming global market pressures, soft-drink giant Coca-Cola said last week its fourth-quarter earnings will be 24 or 25 cents a share, well below First Call analysts' estimates of 30 cents.
3M (MMM), maker of adhesives and specialty chemicals, led its sector sharply lower Wednesday after reporting it expects fourth-quarter profit to drop about 10 percent from last year.
"I think Coke's circumstances are a function of the difficult economies they are facing around the world and just getting their revenue growth restarted, which has not happened as quickly as they would have hoped," said Marc Cohen, an analyst who follows the company for Goldman Sachs. "I don't think it's symbolic, though that there's a real long-term change in the dynamic for them."
He added Coke is well-positioned for growth going forward, estimating the company's revenue could take off significantly in the next three to six months.
"They still have excellent potential and I think by this time next year it'll likely be on track and growing in the mid-teens again," Cohen said.
Looking ahead
In recent weeks, Procter & Gamble (PG), General Motors (GM) and Hewlett-Packard (HWP), have each warned investors that revenue, rather than earnings, will likely fall short of expectations.
Tom Galvin, chief investment officer with Donaldson, Lufkin & Jenrette, said more warnings are likely to come before the week is out.
Based on recent economic activity abroad, however, and the reliance of industrial stocks on manufacturing output and international supply and demand, he said things could be far worse.
"The level is refreshingly strong," he said. "Not only the number, but the magnitudes [of estimate revisions] are not that huge."
Galvin said he believes the Dow Jones industrial average index could break through the 11,000 barrier by the end of next year.
Technology issues, he said, should maintain their recent momentum, while industrial stocks could continue to hit or miss.
"I believe that 1999, like 1998, will be a year of selection," he said. "It's location, location, location [for sector stocks]."
Research analysts at First Call issued a report Wednesday saying their consensus estimates have been "greatly reduced" from initial estimates in early October. The greatest reductions, it said, have come from JP Morgan and Union Carbide, which said they see their fourth-quarter estimates down by 75 percent and 66 percent respectively.
First Call reduced its overall quarterly estimates for the Dow components by 11 percent since the start of the quarter, and 16 percent from its estimates in early July.
Even so, Alger said he maintains a bullish outlook.
"I think what is going to happen is the economy is going to decelerate, and that's going to happen in the first quarter," he said. "We are going to get more cuts from the Fed and I think that's going to drive the market higher."
He added the U.S. economy is still growing at a steady clip, while the long bond yield is falling and overseas markets - outside of Latin America - are starting to trade up. All of those factors bode well for the U.S. stock market, he said. 
--by staff writer Shelly K. Schwartz
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