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Optimism Beneath Profit Warnings

Negative outlooks are modest, data tracker says, and second-half forecasts are growing.

June 19, 2003|Josh Friedman | Times Staff Writer

A spate of profit warnings this week from the likes of Eastman Kodak Co., New York Times Co., Clorox Co. and Tupperware Corp. may have some investors worried about the outlook for corporate results.

But data tracker Thomson First Call had a warning of its own Wednesday: Don't put too much emphasis on the bad news -- at least, not yet.

"Negative pre-announcements" by U.S. companies have been modest in number so far this quarter, according to Boston-based Thomson First Call, which compiles earnings data and analysts' estimates.

What's more, analysts still are raising growth estimates overall for the second half, Thomson First Call said.

That shows optimism remains high about a stronger economy. By this point in the year, it's more typical for analysts to be reducing their estimates.

Still, profit warnings dominated the news on Wall Street on Wednesday, sending some big-name stocks sharply lower:

* Eastman Kodak slashed its profit forecast for the quarter ending June 30 by more than half, citing the SARS outbreak in Asia and the trend toward digital cameras for slowing film sales. The Rochester, N.Y.-based company said it would earn 25 to 35 cents a share, compared with an April forecast of 60 cents. Its stock sank $3.22 to $28.77.

* New York Times also cited severe acute respiratory syndrome as one reason it would miss analysts' average profit estimate this quarter, saying the crisis has cut into travel-related advertising. The publishing chain, whose flagship paper is replacing its top editors because of a recent plagiarism scandal, also cited newsprint and labor costs. Its shares fell $2.91 to $45.63.

* Clorox said net income this quarter would be at the low end of its earlier forecast. The Oakland-based firm said sales of seasonal items such as charcoal have been sluggish because of cool weather in much of the nation.

Clorox said it would earn 67 cents to 68 cents a share with a revenue gain of 1%, versus an earlier profit forecast of 67 cents to 70 cents with sales up as much as 6%. The stock slid $2.96 to $42.29.

* Tupperware said profit would fall shy of expectations because of a rash of sales-party cancellations last month. The Orlando, Fla., company also said it would stop selling its containers at Target Corp. stores, which compete with its parties.

Second-quarter profit will be 20 to 23 cents a share, versus analysts' expectations of 29 cents, Tupperware said. The stock lost $1.36 to $14.70.

Despite Wednesday's warnings, the ratio of downbeat pre-announcements to positive pre-announcements so far this quarter is about 2 to 1, versus the usual 2.5 to 1, Thomson First Call said.

Among companies in the Standard & Poor's 500 index, there were 101 warnings through Tuesday, First Call said, compared with 107 at the same point in the first quarter.

It's possible that many companies are waiting until the final days of June to issue warnings. But some economic reports in recent days have suggested that business activity has picked up this spring, which would be expected to lift earnings.

Firms that have recently raised their forecasts for second-quarter earnings include retailer Bebe Stores Inc., filter maker Pall Corp. and Anadarko Petroleum Corp.

For the S&P 500 overall, second-quarter operating profit is expected to be up 6.2% from a year earlier, according to analysts' estimates as compiled by Thomson First Call. That would continue the profit recovery that began in the second quarter of 2002, though it would be slower growth than the 11.6% gain of the first quarter.

For the second half, forecasts are even rosier: S&P 500 earnings are expected to rise 12.8% in the third quarter and 21.2% in the fourth -- estimates that have crept higher in the last week.

Analysts' willingness to raise their estimates suggests that company executives aren't discouraging them from doing so, experts say.

"The second quarter is going to be this year's runt of the litter" in terms of profit growth, said S&P market strategist Sam Stovall in New York.

In the sizzling technology sector, hopes are especially high: Analysts forecast year-over-year profit growth of 21%, 56% and 27% for the second, third and fourth quarters for tech firms in the S&P 500.

A key question on Wall Street is whether stock prices, up sharply since mid-March, already reflect even the most optimistic profit estimates.

That is why second-quarter results, when reported in July, may be less important than what companies say about the rest of the year, said Thomson First Call analyst Joe Cooper.

"If we don't see a whole lot of optimistic comments out of companies we might be in trouble," he said. "The stock market is trading on lofty expectations."

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