With third-quarter earnings set to be released over the next few weeks, Corporate America has this message for Wall Street: Don’t hold your breath.
Stock prices already have suffered from the Asian economic crisis and, to a lesser degree, from the Clinton-Lewinsky scandal. Now the fear is that a slowdown in earnings will cause further stock declines.
“The inflated prices in the stock market were seen to be justified by the uninterrupted growth in earnings,” said Mark Lindon of Hollister Asset Management in Century City. “So if earnings weaken as we expect, we will continue to see valuations fall.”
Nationwide, analysts are estimating earnings growth of between 4 percent and 5 percent for the third quarter, and as much as 10 percent in the fourth quarter. But those numbers will likely be revised downward in the coming weeks as more companies evaluate the impact of the Asian economic collapse.
“All along, people have been underestimating how slower growth in the Pacific Rim will affect multinational companies in this country,” said Marla Harkness, senior analyst at Oakwood Capital Management. “I think there are some important companies that are likely to disappoint.”
Indeed, some notable local companies already have warned of weaker profits due to the Asian economic crisis. Hilton Hotels Corp., citing weak occupancy rates at its Asian properties, warned on Sept. 14 that its third-quarter profits would come in at the low 30-cents range. That compares with analysts’ earlier estimates of 38 cents per share.
On Sept. 11, Walt Disney Co. warned that its earnings were being undermined by the slowdown in Asia. Besides weaker film attendance, Disney has seen slower sales at its retail outlets and theme parks in recent months.
The company said it expected net income of between 15 and 16 cents per share in the fourth quarter ending Sept. 30. That’s below the 21 cents per share that analysts were expecting.
Dole Food Co., based in Westlake Village, has seen its share price tumble in recent weeks amid fears that turmoil in Russia and weakened demand in Asia would cut into earnings.
Of course, Los Angeles is a diverse economy, and earnings posted by local companies over the next few months are likely to be all over the map.
Among the most vulnerable, for example, will be major aerospace exporters such as Boeing Co., which is L.A.’s largest private-sector employer, and Northrop Grumman Corp.
But the aerospace concerns are not industry-wide. Smaller aerospace contractors around town saw so much downsizing during the recession of the early ’90s that they are now relatively well managed and lightly staffed. As such, they should be able to weather slower growth and even a slight economic downturn.
Another area likely to post lower earnings is financial services. Currency-trading losses have already been reported by BankAmerica Corp., and there is concern that banks could suffer losses from letters of credit written for local exporters.
Meanwhile, local financial institutions with money in the stock market will have seen their portfolios shrink.
On Sept. 16, Imperial Bancorp cut its forecasted third-quarter earnings to between 21 cents and 24 cents per share, compared with earlier estimates of around 55 cents per share, due to losses at its subsidiary Imperial Credit Industries Inc.
Imperial Credit said that the losses, forecasted at between $65 million and $75 million, were largely due to losses it had sustained in the stock market.
“My view related to the Southern California economy is that you will see pockets of weakness among companies that export,” said Harold Harrigian, a partner at Crowell, Weedon & Co. “But I don’t expect a major slowdown.”