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How Will Asia Hit Earnings?

January 13, 1998|WALTER HAMILTON

Ever since Asia's financial meltdown struck Wall Street with full force in October, investors have held their breath, worrying about its negative impact on U.S. corporate earnings.

The market feared that floundering Asian countries would buy fewer U.S. products while a torrent of cheaply priced Pacific Rim exports could force U.S. companies to cut prices domestically. All this would come, they feared, at a time when profit growth already would be harder to come by because companies had little fat left to trim after years of steady cutbacks.

Investors got a taste of that bad news Monday when technology giant Motorola Inc. fell three cents short of analysts' fourth-quarter earnings estimates. The maker of computer chips and cellular phones said weak Asian economies partially hurt sales and pricing.

Naturally, it's too soon to draw a definitive conclusion about corporate profits from one company's numbers. A more important litmus test comes today when influential Intel Corp. unveils its results. But if Motorola is any indication, U.S. companies are likely to have a tough time producing the buoyant earnings that investors have come to expect in the last three years. And if that's the case, the stock market could be in for more shocks in the months ahead, experts say.

"Assuming there's not some unusual explanation put forward [by Motorola] to reassure the market and you take this at face value, it certainly doesn't look very positive," said Chuck Hill, research director at First Call Corp., a Boston firm that tracks earnings projections.

When the fourth quarter began on Oct. 1, stock analysts expected the companies that make up the S&P 500-stock index to report aggregate earnings growth of 13.2%, according to First Call.

But those estimates have come down steadily ever since the Asian turmoil hit U.S. markets, when the Dow Jones industrial average plummeted 554 points on Oct. 27. As companies report their quarterly results in the next few weeks, analysts now look for growth of just 7.8%.

The outlook for individual sectors with heavy Asian exposure has slid much more. Technology profits, for example, were projected to grow 21% in the fourth quarter. Analysts now expect 10%. Among paper, steel and other basic materials companies, which are vulnerable to cheap exports from Asia, the earnings forecast has slumped to 9% from 22%.

Even more troubling, the prognosis for the fourth quarter of 1997 is relatively healthy compared with the earnings expected in the first half of this year.

Though a number of companies already have blamed Asia for earnings shortfalls, the true damage to financial statements probably won't show up until figures for the first and second quarters are released later this year. That's because it takes time for Asian clients to cancel orders or for cheap Asian exports to take their toll. And some companies undoubtedly will divulge poor earnings only after their attempts at masking their problems have failed, analysts say.

"Fourth-quarter growth is not going to be that bad," said Don Hays, chief investment strategist at Wheat First Butcher Singer in Richmond, Va. "The fourth quarter is going to be the last good quarter. After this, we think every quarter this year is going to be disappointing."

Not everything is dismal on the earnings front, however.

After an early-morning sell-off, stocks of large companies like Intel and Microsoft Corp. rallied solidly Monday on hopes of respectable profits. Investors had become so pessimistic in recent weeks that many stocks were priced as though poor earnings were guaranteed, analysts said. To some investors, they were a bargain.

That thinking was reinforced when three well-known Wall Street strategists--including Abby Cohen at Goldman, Sachs & Co.--made positive comments about U.S. stocks.

In a report to her firm's clients, Cohen said the negative impact of Asia on U.S. earnings will be "muted." U.S. companies sell all over the world, she said, and don't rely exclusively on Asia. What's more, because the U.S. imports more from Asia than it exports, the region's wave of currency devaluations could lower production costs for some U.S. companies.

Cohen, who has become one of Wall Street's most influential analysts because her consistently bullish market calls have been on target, looks for 8% profit growth this year. When the 2% inflation rate is subtracted out, the 6% real profit growth rate tops the historic pace. As for stock prices, Cohen argues that investors will be cheered by the durability of profit growth, even at reduced levels, and be willing to live with a drop in the pace of profit growth.

It also should be noted that dire profit warnings have been sounded in the past several years and companies have beaten them repeatedly.

Still, most Wall Streeters are bracing for the worst this time around.

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