Will corporate profits be taken down by the twin threats of hurricanes and oil?
Companies making up the Standard & Poor’s 500 are expected to report an 18.2 percent rise in third-quarter earnings, up from a 16.8 percent increase in the third quarter a year ago, according to Thomson Financial, which compiles analysts’ earnings forecasts.
The projected profit estimates did not factor in Hurricane Rita and as of late last week it appeared that could become an issue. More than 70 percent of U.S. oil production is located on the Gulf Coast, and with production halted, fuel prices are expected to spike in the final few days of the third quarter.
California and Los Angeles, in particular typically feel the brunt of higher gasoline prices, despite the fact that the state does not import any oil from the Gulf Coast. Still, some L.A. companies could benefit from the economic climate, including Occidental Petroleum Corp. and Unocal Corp., now owned by ChevronTexaco Corp.
John Butters, a Thomson research analyst, said oil and gas companies are experiencing one of their most profitable years on record, with 70 percent year-over-year projected earnings growth even factoring in the impact of Hurricane Katrina.
The strong third quarter outlook marks the ninth straight quarter of double-digit earnings growth and only the fourth time in the past 50 years when companies have sustained double-digit earnings increases for nine quarters consecutively.
But a slowdown is on the horizon, since energy companies are skewing overall results. Take away ExxonMobil Corp. and ChevronTexaco from the equation and the average increase in corporate profit dips to 12.1 percent in the third quarter.
Richard Weiss, executive vice president and chief investment officer at City National Asset Management, a unit of City National Corp., said the economy is definitely slowing, although he believes there is little fear of a recession.
“The stock market has been held back by high oil prices,” he said. “It’s a major tax on the economy and it slows things down.”
