By Noelle Knox And Maxwell Murphy
Disruptive change can be good, bad or just plain scary. That is
clear from the strongest trends in second-quarter financial
results.
Seismic shifts in the technology and health-care sectors
highlight why executives are divided or undecided about taking
financial and strategic risks. At the same time, the number of
geopolitical tinderboxes has multiplied, raising the stakes for
multinationals. General Motors Co., Procter & Gamble Co. and
General Electric Co., for example, sell more than half of their
products overseas.
"It's much tougher for businesses to do contingency planning in
a slow growth environment, which is what we're in globally right
now, especially in the face of unprecedented idiosyncratic risks,"
said Stephen Roach, a senior fellow at Yale University and a former
chief economist for Morgan Stanley.
Overall, financial performance between April and June was solid.
Companies in the S&P 500 are expected to post earnings growth
of 7.6% over year-ago levels and a revenue bump of 4.4%, based on
projections from FactSet. More than 90% of the companies have
already reported.
However, recent news that Microsoft Corp. and Cisco Systems Inc.
will fire up to a combined 24,000 employees means tech-sector
layoffs this quarter will likely top last quarter's 25,000, which
was up about 20% from the second quarter last year, according to
Challenger, Gray & Christmas Inc., an outplacement firm.
In late May, Hewlett-Packard Co. said it would hand pink slips
to as many as 16,000 more employees as part of a restructuring plan
launched two years ago.
"We continue to see an acceleration of the massive shifts that
are transforming the way customers buy, pay for and consume
technology," Meg Whitman, H-P's chief executive officer, told
investors at the time. "This reality is creating both opportunities
and challenges for H-P and every one of our competitors."
The tech industry is expected to show earnings growth of 9.2% in
the second quarter, compared with the year-ago period, and revenue
up 6.6%, according to FactSet.
However, 17 tech companies have already warned investors their
profits will be lower than expected for the third quarter, more
than any other sector.
"They're chasing the next area of growth," explained John
Challenger, CEO of Challenger, Gray & Christmas. "It's like a
forest fire that comes in, and it does change and prepare the
ground" for future foliage to sprout.
Cisco plans to "reinvest substantially all of the cost savings
from the restructuring actions in our key growth areas," Chief
Financial Officer Frank Calderoni told investors last week.
At the opposite end of the spectrum is the health-care industry.
Disruptive change, spurred in part by the still-evolving Affordable
Care Act, has made many companies hire thousands and plow millions
into their businesses.
The health-care sector is expected to post revenue growth of
12.2%, the highest of any sector, and earnings growth of 15.9%,
second only to the telecommunications industry.
Health-care companies increased spending on buildings and
equipment by 15%, the greatest surge of any sector and compared
with a 24% decline in the second quarter last year, according to
FactSet.
Companies boosting capital expenditures included Tenet
Healthcare Corp., which nearly doubled its spending to $242
million. Baxter International Inc. and Cardinal Health Inc. both
increased capital spending by more than 20% to $423 million and
$111 million, respectively.
Atlantic Health System is spending millions of dollars on an
electronic medical-record system to replace its current 10, in part
to respond to changing regulations.
The closely held hospital group based in New Jersey also plans
"a lot of projects in the $5 million-to-$10 million range," such as
more ambulatory-care facilities, said CFO Kevin Lenahan. "We want
to be more involved in the total dollar" of patients' health-care
spending.
New technologies and legislation, however, can be easier to
react to than rockets, deadly viruses or a coup d'état. Plus, there
is the added risk for multinationals of currency volatility and
controls.
In the second quarter, the Russian ruble stabilized against the
U.S. dollar, but that was little comfort for companies affected by
U.S. and European economic sanctions over the conflict with
Ukraine.
European economic growth also has slowed. Italy is in another
recession and France has flatlined.
Currency controls and economic turmoil in Venezuela continued to
weigh on companies like Ford Motor Co. and Stanley Black &
Decker Inc.
"Zero sales in Venezuela once again," said James Loree,
president and chief operating officer of Stanley Black &
Decker, referring to the negligible value of their invoices.
Aon PLC, an insurance broker and risk-management consultant,
publishes a quarterly risk map of hot spots around the world and
there are many more crimson countries than last year.
"The world is a more dangerous place," said Roger Schwartz, head
of Aon's political-risk practice. "Over the past six to 12 months
we've seen a steady increase in demand for political-risk
insurance, driven by the unfortunate deterioration of geopolitical
situations in a lot of areas."
Craig Foster, CFO of Ubiquiti Networks Inc., which sells
communications-networking equipment in 160 countries, is tracking
four situations now: the conflicts between Russia and Ukraine, and
between Israel and Palestine, as well as the Argentine bond default
and the increasing violence in Iraq.
"We don't believe we're going to be able to ship into [Iraqi]
because of the issues that they're having with the ports and kind
of ongoing skirmishes in the country," Mr. Foster said.
"'When we think it's safe, we'll send it,'" he said his
distributors in Saudi Arabia told him, "'but for now don't send
anything.'"
Write to Maxwell Murphy at maxwell.murphy@wsj.com
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