By Maxwell Murphy
The latest earnings forecasts are causing some whiplash.
Analysts kicked off the year with upbeat corporate predictions,
but an earnings season filled with warnings of continued volatility
has them slashing estimates by the widest margin in six years.
Thanks to falling energy prices, weakness in foreign markets and
a stronger dollar, the blended consensus growth outlook for
first-quarter earnings among S&P 500 companies has been pushed
down by about nine percentage points, according to FactSet
data.
In the process, earnings forecasts overall have gone from being
up to being down, when all companies are lumped together. Equity
analysts now expect nearly a 5% drop in year-over-year earnings
this quarter for the group, an about-face from a 4% growth rate at
the start of the year.
And finance chiefs tempted to give more frequent updates based
on current conditions risk seeing the environment shift before the
quarter ends.
"It was the one of the worst guidance periods since the great
recession, " said Carmine Grigoli, chief investment strategist for
Mizuho Securities USA.
Earnings aren't expected to be down in all sectors, but every
sector took a hit. Cuts in profit estimates at Exxon Mobil Corp.,
Caterpillar Inc., and Microsoft Corp. helped drag down the entire
S&P 500 index.
Microsoft said sales in Russia, China and Japan were
disappointing, and foreign exchange crimped revenue. CFO Amy Hood
told analysts in January it expects those challenges "will be in
place throughout the remainder of our fiscal year." Analysts
chopped fiscal third-quarter estimates by 25%.
Downgrades were deepest in the energy sector, with oil prices
roughly half what they were last summer. Exxon followers shaved 41%
off estimates, while per-share earnings expectations for Chevron
Corp. dropped 61%. The company suspended its share-repurchase
program, for the year, "given the change in market conditions," CFO
Patricia Yarrington told investors recently.
Exxon Mobil and Chevron declined to comment.
Cheap oil and the strong dollar's victims weren't confined to
one sector. Estimates for the industrials sector fell seven
percentage points this year, as deep downward revisions were made
at companies such as equipment maker Caterpillar Inc., General
Electric Co. and Boeing Co.
Roughly $7 billion of Caterpillar's annual sales are related to
oil and gas exploration and production companies. Additional global
macroeconomic pressures left the company bracing Wall Street for
its third consecutive year of sales declines. Analysts slashed
estimates 18%.
"We're still not getting any decent economic growth in Europe.
The developing countries, Brazil, China, are still, let's just say
challenged," said Michael DeWalt, vice president for Caterpillar's
financial services division, during a call with analysts.
When asked if the guidance was too conservative, he said
Caterpillar tries to pick a "reasonable" middle ground. "There are
always upsides and downsides to the forecast."
Still, many companies have managed to do well despite the
unstable macroSHYeconomic environment. Upward revisions of
current-quarter estimates for Apple Inc., Marathon Petroleum Corp.
and UnitedHealth Group Inc. helped buffer the technology, energy
and health-care sectors.
For Apple, better-than-expected sales of its new phones boosted
confidence. CFO Luca Maestri in January estimated fiscal
second-quarter revenue to be between $52 billion and $55 billion,
up from $45.6 billion in the year-ago quarter.
Analysts, in turn, raised per-share earnings estimates about
6%.
But even Apple expressed concern over "growing-foreign exchange
headwinds from the continued strengthening of the U.S. dollar
against most currencies," according to Mr. Maestri.
Most companies don't give Wall Street periodic guidance because
few finance teams can chart a long-term course through turbulent
global operating conditions. Barely one in five S&P 500
companies gave earnings guidance for the quarter ending March
31.
"Some days I wonder if we should be more open and help the
Street a little better," said Anne Lloyd, CFO of Martin Marietta
Materials Inc. The construction-materials company, like many of its
peers, used to provide quarterly guidance, but decided to shift
gears during the market crash of 2008 when it "really couldn't see
around the corner," Ms. Lloyd said.
Giving such granular guidance "sets a dangerous precedent" and
is "almost a no-win situation" for a company that plans for
business cycles that can last about seven years, she said.
Health-care provider UnitedHealth said 2015 earnings growth
could potentially reach "double digits." Consensus estimates for
the first quarter rose more than 6% following the company's earning
call in January.
"I'm certainly a fan of company guidance," said Thomas Carroll,
who covers UnitedHealth for Stifel Nicolaus Co. But providing too
much guidance invites analysts to overthink and get "nit-picky"
about results, and that could lead investors to question an
analyst's position.
"Companies that give too much guidance," Mr. Carroll said,
"provide too much rope for the analysts to hang themselves."
Write to Maxwell Murphy at maxwell.murphy@wsj.com
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