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Companies Stay Downbeat About Profit Outlook

Many cite war threat in gloomy forecasts. But some observers say the pessimism is overblown.

February 03, 2003|Tom Petruno and Thomas S. Mulligan | Times Staff Writers

Corporate America is worried and downbeat about 2003.

The question, though, is whether that pessimism is on target -- or a bit overstated by executives who would rather be safe than sorry.

Keeping the bar low is a time-honored strategy for many companies: It makes it that much more likely that they'll pleasantly surprise Wall Street with their results. If executives' concerns are overblown and companies' sales and earnings come in much stronger than anticipated this year, it could eventually bode well for the economy and the stock market.

But for now, Wall Street seems to be believing what it's hearing. Major stock indexes closed Friday down for the third straight week, though the pace of the decline slowed.

The Dow Jones industrial average ended at 8,053.81, off nearly 1% for the five-day stretch after tumbling 5.3% the previous week. The Dow is down 3.5% year to date, on track for its fourth consecutive losing year.

As companies reported fourth-quarter earnings in recent weeks, investors paid less attention to those results than to what executives said about what lies ahead.

Thomson First Call in Boston, which tracks corporate earnings and forecasts, said Friday that 59% of the 332 companies that have issued first-quarter profit outlooks have warned about disappointing results compared with analysts' expectations.

That is higher than the percentage of near-term outlooks that were negative at the same point in each of the last four quarters, Thomson First Call said.

One month into the last quarter, for example, 47% of companies predicting results for the period were downbeat, while 53% expected earnings to beat estimates or match them.

To be sure, there is plenty for executives to legitimately worry about, starting with the potential for war between the United States and Iraq. Such fears were cited by Federal Reserve policymakers last week as they concluded their first meeting of the new year.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," the Fed said.

The space shuttle disaster Saturday may well add to the unsettled feelings that investors and executives have.

At heavy-machinery giant Caterpillar Inc. in Peoria, Ill., Chief Financial Officer Lynn McPheeters said the company believes it has good reason to be cautious about sales this year, with the threat of war looming.

"The feeling we're getting from our dealers, who are in direct contact with customers, is that project funding is being held up in many cases until this uncertainty goes away," McPheeters said.

At Textron Corp., the manufacturing conglomerate that makes everything from aircraft to golf carts, some customers for such big-ticket items as Cessna corporate jets have been pushing buying decisions into next year, at least partly because of the geopolitical uncertainty, spokeswoman Sue Bishop said.

Textron's Wichita, Kan.-based Cessna Aircraft unit has pared its estimate of business jet deliveries this year to 220 from an earlier projection of 250.

The prospect of war "is clearly having an impact" on the business climate, said economist Jason R. Trennert, an investment strategist at International Strategy & Investment Group in New York. "Among capital-goods-intensive companies, based on our contacts, it seems clear that the war is delaying their decisions to invest."

This is a problem, Trennert said, because business investment is regarded as key to getting the economy humming again. Consumer spending, the biggest component of the economy, has contributed more than its share to gross domestic product growth in recent years and may be on the wane. Any rebound will need the support of strong business spending, he said.

But with war on the horizon, decision makers are "reluctant to step in front" and commit to big spending projects, Trennert said.

Santa Clara, Calif.-based semiconductor giant Intel Corp. said last month that it expected to cut capital spending as much as 26% this year because it's unsure whether demand for personal computers will rebound.

The ripple effect hit Applied Materials Corp., the leading maker of semiconductor manufacturing equipment. Applied Materials, also based in Santa Clara, said Friday that orders fell more than expected in its quarter that ended last week. The company's stock sank 98 cents to $11.97 Friday on Nasdaq and lost 8.1% for the month.

More modest corporate spending also is being held up by war fears, some companies say.

Hilton Hotels Corp. last week cut its profit estimate for 2003, with Chief Executive Stephen F. Bollenbach blaming the continuing slump in business travel for keeping the company from raising room rates to bolster results.

Bollenbach said Hilton expects to earn in the mid-to-high 40-cents-a-share range this year. Analysts had been expecting 54 cents, on average, according to Zacks Investment Research.

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