Slump trims brokers' forecasts of corporate profits
Wall Street securities analysts are starting to whittle their 1982 earnings estimates. They are shaving their estimates of profits as the recession takes its toll on the corporate pocketbook.
For example, in a recent revision of its earnings estimates, Merrill Lynch, Pierce, Fenner & Smith Inc. lowered its 1982 earnings estimates on some 35 companies it follows, while increasing them on only 11.
Some of the revisions were considerable. For example, Merrill Lynch cut its estimate on Continental Airlines from $1 a share to 25 cents a share, and, for Hoover Universal, from $4 to 4.50 a share to $3.
Merrill Lynch is not alone. At Bear, Stearns, another brokerage house, analysts recently issued a stream of reports that lowered earnings estimates on companies in the restaurant, computer, defense, and oil industries - areas that had not been affected by other recent economic downturns. Analysts at E. F. Hutton have likewise started to lower their '82 estimates.
Edward Yardeni, chief economist at E. F. Hutton, says: ''We in the economics department at Hutton had about the same experience as other institutional investors; namely, trying to convince the analysts that things would get worse. Finally, last year, we convinced them the downturn would be severe and they cut back on 1981 earnings estimates. Now they are getting feedback from the companies and finding out that business conditions still aren't so good, so they are cutting back on 1982 estimates.''
This pruning of estimates is not unusual, points out Don Hahn, director of market research at A. G. Becker Inc. in Chicago. ''When the trends get going, it's difficult catching up to them.'' Like the other brokerages, Becker is in the process of trimming the '82 estimates. ''Faced with the standard economic forecast,'' Mr. Hahn says, ''a lot of companies felt they could gut it out. Now they are cutting back and the analysts are adjusting their earnings.''
Another reason for the downward revisions is that the recession is now expected to last a quarter longer than originally expected. Last fall Wall Street analysts were expecting to see the economy perking up by this spring. Now , says Al MacKinnon, executive vice-president at Merrill Lynch Economics Inc., ''because of the inventory liquidation going on, it looks like we'll have another down quarter.''
Merrill Lynch is estimating that corporate profits will not show a positive comparison until the fourth quarter of 1982. Earnings will be down 40 percent on an annualized basis for the fourth quarter of 1981 (now being reported), compared with last year's fourth quarter; down 27 percent for the first quarter; down 11.5 percent for the second quarter, and 2.5 percent for the third. Merrill estimates that by the fourth quarter earnings will rebound by an annualized 23 percent.
Naturally some companies will survive the recession better than others. Mr. Yardeni says companies involved in defense spending may fare better. And utilities have traditionally done reasonably well during recessions. Still other companies, ones that can increase their unit volume while lowering their costs, will show earnings gains. A classic example is a bakery. When the price of wheat falls, unit costs are lowered, which may help stimulate demand.
Most of the cyclical companies, however, will fare poorly this year. Yardeni says such consumer durables as autos and appliances will have another poor year. Gold, silver, and aluminum companies are also likely to post poor earnings comparisons.
In fact, Yardeni says, within two to three months the economy may reach a crisis point. ''If interest rates remain high, we risk a depression,'' he says, ''since we do structural damage to industry. Many companies are facing severe cash-flow squeezes and now are laying off engineers'' and other critical white-collar workers.
Replacing these workers is difficult and can cause a company a lot of damage. Whether or not it becomes a depression, says Hahn of A. G. Becker, ''is the $64, 000 question.'' He says he believes the country will end up with a lot of companies that are stronger than they were two to three months ago, since they will be leaner and better able to compete.
Pension fund assets outpaced inflation last year. According to the latest survey of pension funds by Pensions & Investment Age, the assets of the 1,000 largest pension, profit-sharing, and thrift plans sponsored by companies and state and local governments totaled $519.2 billion, up 10 percent.
The Bell System operates the largest pension pool, controlling some $37 billion. According to P&I, the recent antitrust settlement between AT&T and the Justice Department will probably result in this pool being distributed in part to the operating companies, which will be spun off by AT&T.
The pension magazine also found that during 1981, the largest pension funds made what it called ''a substantial'' investment in real estate, including office buildings, supermarkets, and warehouses. Some 97 funds have invested in real estate, with assets worth $6.8 billion.
The stock market tried to stabilize last week in the face of rising short-term interest rates. In spite of this, the Dow Jones industrial average dropped 3.24 points, closing at 845.03. The general market maintained a downward bias. Also, as Newton Zinder, an analyst at E. F. Hutton, noted, the transportation index remained glued to the floor, a bad technical indicator, which the analyst says ''would suggest further weakness ahead.'' The main activity in the market centered on takeover targets.