Firms Shy From Income Estimates In Poor Economy

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Firms Shy From Income Estimates In Poor Economy

By ANTHONY PALAZZO

Staff Reporter

With the economy on shaky ground, analysts are having a harder time projecting earnings for next year.

Last week, Amgen Inc. postponed its annual analyst meeting scheduled for Nov. 21, saying it wasn’t ready to answer questions about a new factory, Medicare pricing levels for one of its drugs, and a legal dispute. Its stock fell 7.7 percent.

A similar fate befell Computer Sciences Corp., which is banking on a big contract with the German Defense Ministry, even though one of its partners in Europe is on the verge of bankruptcy.

Last month, Reliance Steel & Aluminum Corp. projected fourth quarter earnings of 20 to 30 cents a share a range so broad it had little meaning.

“The economic climate remains an unknown,” the L.A.-based company’s chief executive, David Hannah, said at the time. “This uncertainty makes it very difficult to predict our financial results going forward.”

Earlier this year, soothsayers were forecasting a strong second-half earnings rebound. But during the summer, it became clear that the economic recovery was tentative, at best. Now, with a mediocre holiday season already assumed, the spotlight is turning to 2003.

“The crystal ball is much fuzzier than it normally is. That was true last summer and it’s even more true now,” said Chuck Hill, director of research at Thomson First Call, which tracks earnings estimates nationwide.

Analysts project earnings growth of 15.1 percent in 2003 among the S & P; 500 companies, from 2002 levels, Hill said.

Cloudy future

Such projections usually are lowered as the reporting period approaches, even in the best of times. But current projections appear to be flimsier than ever.

“You have to worry about whether the consumer is going to spend enough to tide us over to some time next year, when, hopefully, capital spending picks up,” Hill said.

Once the holidays are over, the economy will need help from capital investment corporations investing in their businesses if it is going to show any distinct improvement. Last week, the Federal Reserve cut short-term interest rates by half a percentage point, in part to stimulate such spending. But with the economy giving off weak signals, companies in nearly every industry sector are still playing it safe.

“Company after company is saying basically that they are not ramping up capital spending. They are keeping it flat with 2002 levels,” said Mark Pibl, head of high-grade credit research at Barclay’s Capital in New York.

It’s something of a chicken-and-egg dilemma, Pibl said.

At Computer Sciences, new business is dependent on capital spending. Yet the company’s own spending has been cut back to preserve profits.

“We certainly are limiting the purchase of assets for internal use to those justified by a strong business case,” said Edward Boykin, CSC’s president and chief operating officer, on the company’s earnings conference call last week. “We take a hard look at the short-term payback to make sure that where we expend capital and incur costs those are justified.”

When large customers need to build their computer infrastructure, they often hire Computer Sciences or IBM to do the job. Such contracts involve large purchases of computer equipment, stimulating economic activity far and wide.

But in a challenging environment, fewer commercial customers are making these investments. El Segundo-based Computer Sciences is emphasizing sales into government sectors, such as defense and national security. But even there, the road is challenging.

Negotiations for a $6 billion contract to manage the German army’s technology infrastructure are in danger because one of CSC’s partners, MobilCom AG, is nearly insolvent.

Computer Sciences executives last week expected the deal will get signed by the end of March. Meanwhile, the company lowered its earnings targets to $2.60 a share for the fiscal year that ends in March 2003. Analysts were predicting earnings of $2.68.

Tracy Herrick, chief investment strategist with Jefferies & Co., said he expects corporate earnings growth of about 5 percent next year, using government data. That’s not fast enough for companies and workers to dig themselves out from under the large debt burdens they built up in past years, he said. And, Herrick added, “not enough to remove the problem of overvaluation on most stocks.”

On Nov. 6, Amgen, said it would delay its analyst meeting by three months, to Feb. 25, to answer questions pertaining to a factory to make its arthritis drug, Enbrel, Medicare pricing on its Aranesp anemia treatment, and a lawsuit over its blockbuster drug, Epogen. Amgen gained control of Enbrel with its acquisition of Immunex Corp. earlier this year.

“We believe that the largest risk to Amgen stock is the likely possibility that the company will have to again bring down financial guidance related to the Immunex acquisition,” said Meirav Chovav, a UBS Warburg analyst, in cutting her rating to “hold” from “buy.”

Avoiding disaster

Overall, Reliance Steel has avoided the disastrous results that have driven other metals products companies out of business. With an average order size of $900, Reliance sells metal products in 27 states, France and South Korea. Its 75,000 customers are mostly “jobbers,” smallish shops that respond to larger demand in the manufacturing, construction and transportation industries.

“It would take an increase in both customer demand and pricing of metals products to see any kind of significant upturn in our results,” said Kim Feazle, the Los Angeles-based company’s director of investor relations.

At the retail level, competition is keeping down profits as well. In one sub-sector, video games, the number of titles increased to 1,100 from 700 in last year’s holiday season, said James Lin, managing director at Jefferies.

Now stores are refusing to stock all the titles, making it hard for local companies like Activision Inc. and THQ Inc. to forecast earnings. “The retailers have been cherry-picking the titles that they think are going to be hits,” Lin said.

While steady, if mild, seasonally adjusted earnings improvement in each quarter this year has held off the prospect of a double-dip recession, that could change, in early January, when companies begin revising earnings estimates for 2003, Hill said. The current first quarter estimates are for earnings growth of 13.5 percent.

“I don’t have a good feel for where that’s going to come out,” Hill said. “It’s likely to be less. The danger is, could it be significantly less? I just don’t know.”




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