VOL. 127 | NO. 208 | Wednesday, October 24, 2012
Weak Earnings Reports Pummel Stocks
CHRISTINA REXRODE | AP Business Writer
NEW YORK (AP) — Nobody was expecting this round of corporate earnings reports to be great. But companies' underwhelming results are still rattling investors.
Stocks plunged Tuesday in one of the worst days on Wall Street this year. Big-name companies reported weak quarterly revenue and lowered their forecasts for the rest of the year.
The Dow Jones industrial average sank as much as 262 points, or roughly 2 percent. In the late afternoon, it was down 208 points to 13,138.
The Dow's biggest decline this year was 274 points. That was June 1, the day the government released a weak jobs report.
Other indexes also fell sharply Tuesday. The Standard & Poor's 500 index was down 17 points to 1,417, and the Nasdaq composite index was off 16 points at 3,000. The Nasdaq hasn't closed below 3,000 since Aug. 6.
Companies of all stripes signaled that the economy is far from healed, and that demand isn't what it was a year ago. DuPont, 3M, UPS and Xerox all missed financial analysts' expectations for revenue.
Because of their global footprints and variety of products and services, those companies augur how the world economy is performing.
Chemical maker DuPont said it will have to cut jobs and other expenses after sales fell throughout the world. 3M, which makes all manner of products including Scotch tape and coatings for LCD screens, cut its profit prediction for the year.
UPS, the world's largest package-delivery company, warned that the pace of global growth remains uneven, and that the holiday shopping season could prove disappointing.
Xerox reported steep declines in sales of equipment and supplies and noted that the "challenging economy" was causing "cost pressures for large enterprises and governments."
Tim Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City, wasn't sure whether the soft earnings results were the main problem, or just a symptom of a sputtering economy.
Many analysts were already expecting declines in earnings growth and revenue before companies started reporting results.
"They're using that as an excuse, but it's the broader issues that are driving it," Courtney said. "What's going to happen with the election, what's going to happen with the fiscal cliff? Europe is already in recession — are we going to go too? That fear is driving a lot of the selling right now."
The so-called fiscal cliff is a combination of tax increases and government spending cuts that will take effect Jan. 1 unless Congress intervenes.
DuPont and Xerox were among the worst-performing stocks in the S&P 500. DuPont slid $4.35 to $45.41. Xerox was down 37 cents to $6.66. 3M slipped $3.19 to $89.34. The exception was UPS, which rose $2.24 to $73.80, apparently able to convince investors that it can make money even in a weak economy.
Not only is the third quarter earnings season shaping up to be poorer than many expected, those companies that have been willing to make predictions about what's coming up in the fourth quarter have been overwhelmingly pessimistic.
Of the 23 companies in the S&P 500 that had made forecasts as of Monday, 18 lowered their expectations for fourth-quarter results, and five kept their forecasts roughly the same. None raised their forecasts.
Piling on to the weak earnings news, the Federal Reserve Bank of Richmond, Va., reported that manufacturing in the central Atlantic region "pulled back" in October, and said that manufacturers had grown less optimistic.
The price of crude oil fell, another sign that investors expect a weak economy. The yield on the benchmark 10-year U.S. Treasury note sank to 1.77 percent from 1.82 percent Monday as nervous investors sold stocks and shifted money into low-risk U.S. government bonds.
Of the 123 companies in the S&P 500 that had reported earnings as of Monday, only 38 percent beat expectations on revenue, according to John Butters, senior earnings analyst at FactSet, a provider of financial data.
That's far below the average of 56 percent over the past four years and the lowest proportion since the first quarter of 2009, when the stock market hit its lowest point of the Great Recession.
Companies have done better on earnings: 67 percent have beat expectations so far, according to Butters. But investors are interested in revenue as a more accurate measure of growth, because earnings can swing wildly because of one-time factors like accounting gains.
Some of the disappointing revenue is due to weakness in foreign markets. Multinational companies are having a hard time selling to Europe, which has been hobbled by recession. The red-hot growth in emerging markets like China and India is also slowing down, and many businesses that had relied on growth there to offset weak U.S. consumer demand are being forced to come up with new strategies.
"The recession in Europe is very real," said Bernard Schoenfeld, senior investment strategist for Bank of New York Mellon Wealth Management in New York. "It's not going to disappear very quickly, and it will certainly negatively affect earnings of exporters in the United States."
Schoenfeld cited the weakness in materials companies as a reflection of the weakness in emerging markets.
Companies are blaming some of the revenue declines on the stronger dollar. As the dollar gains value, as it has over the past year, the money that multinational companies make overseas translates into fewer dollars back at headquarters.
"They're feeling the pain of the stronger dollar," said Kathy Lien, managing director at BK Asset Management in New York. "Companies try to hedge, but they don't always hedge perfectly."
Lien said that so far this earnings season, Google, Philip Morris, IBM and Coca-Cola Bottling Co. have complained that the stronger dollar has hurt revenue.
Among other stocks making big news:
— Yahoo jumped 92 cents to $16.69, an aberration on a gloomy day. The company's first earnings report under Marissa Mayer as CEO easily beat the forecasts of Wall Street analysts. Yahoo hired Mayer from Google in July to orchestrate its latest turnaround attempt.
—Luxury handbag maker Coach, motorcycle maker Harley-Davidson and Whirlpool all soared after reporting quarterly results.
—Apple fell $12.99 to $621.04 ahead of the expected release of a smaller version of its iPad. Apple has the most sway among stocks in the S&P 500 and the Nasdaq composite and helped drive those indexes lower. A smaller, cheaper iPad could help Apple compete with Amazon's Kindle Fire and Google's Nexus 7. It's not clear how profitable a smaller tablet would be..
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