New York: Corporate earnings will continue to slump into the first half of 2009 amid the first simultaneous recessions in the US, Japan and Europe since World War II.
Earnings at Standard and Poor’s (S&P’s) 500 companies will probably fall in the first half, marking eight straight quarters of declines.
In Europe and Asia, the outlook may be even worse as the recession curbs demand for retail goods and exports.
Closing shop: A Circuit City store in North Carolina, US. About a dozen US retailers, including Circuit City Stores, filed for bankruptcy in ’08. Jim R Bounds / Bloomberg
“It’s going to be a miserable ride,” said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages about $30 billion (Rs1.45 trillion). “Earnings probably won’t rebound until the end of 2009. The market recovers, then the economy recovers, then finally the earnings recover.”
Companies are battling falling consumer demand and dwindling cash flows after banks tightened lending to cope with billions of dollars of real estate losses. The US Federal Reserve has cut interest rates to as low as zero, while governments worldwide have taken stakes in banks and firms to prevent a collapse of the global financial system.
“We hit the peak in earnings in 2007, and in 2009 we’re going to see continued deterioration,” said Diane Garnick, who helps oversee $500 billion as an investment strategist at Invesco Ltd in New York. “Analysts’ earnings estimates are still way too optimistic.”
In the US, profit at S&P’s 500 firms will fall 11% in the first quarter, followed by a 6.2% drop in the following three months, according to Bloomberg data. “Earnings should improve in the second half, driven by a rebounding financial industry,” the data show.
While profits will rise 4.3% for the full year in the US, earnings in Europe are projected to drop for all of 2009 and analysts predict worsening reports out of Asia as the recession hasn’t fully hit there yet.
The energy sector will lead US declines, with earnings estimated to fall 29% in 2009.
Profit at ExxonMobil Corp., Chevron Corp. and ConocoPhillips Co., the largest US oil firms, will likely shrink after the recession sapped demand, spurring a 78% drop in crude oil prices from July’s record.
At Irving, Texas-based ExxonMobil, the world’s biggest publicly traded firm, earnings will probably tumble 39% to $28.2 billion, the first decline since 2002, according to a Bloomberg survey of analysts.
Earnings at US retailers will fall 20% this year, according to analysts’ estimates. The International Council of Shopping Centers in New York predicts 73,000 US stores may shut in the first half of 2009 after what may have been the worst holiday shopping season in 40 years. That’s after about 148,000 stores closed last year, the most since the 2001 recession, according to the trade group.
“You’ll see department stores, speciality stores, discount stores, grocery stores, drug stores, major chains—either multi-regionally or nationally—go out,” said Burt Flickinger, managing director of Strategic Resource Group, a retail industry consulting firm in New York.
AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations as consumers tighten budgets. At least a dozen US retailers filed for bankruptcy in 2008, including Circuit City Stores Inc., Linens ’n Things Inc. and Sharper Image Corp.
Wal-Mart Stores Inc., the largest retailer, may report a 6% profit increase this year by offering lower prices to consumers seeking bargains, according to estimates.
JPMorgan Chase and Co., Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley, the biggest US banks, will probably post higher profits this year compared with 2008, when finance companies wrote down at least $720 billion of losses.
“For the large financials, it’s going to be a very difficult year,” said David Burg, a Purchase, New York-based analyst at Alpine Woods Capital Investors Llc., which manages about $6.5 billion, including JPMorgan shares. “The story for 2009 continues to be radical transformation—companies fundamentally changing their business model.”
Goldman Sachs and Morgan Stanley, which were the two biggest US securities firms before converting into banks, will suffer from a 15% decline in mergers and acquisitions and slowing underwriting fees, Kenneth Worthington, an analyst at JPMorgan in New York, said last month in a note.
US auto makers will show some improvements in 2009 after sales plummeted last year, forcing the government to lend $13.4 billion to General Motors Corp. (GM) and Chrysler Llc. to keep them out of bankruptcy. GM’s loss may narrow to $12.8 billion from $19.6 billion last year, according to analysts’ estimates. Ford Motor Co. may report a loss of $6.38 billion, compared with $9.2 billion last year, the estimates show.
“Technology will be one of the best-performing sectors in the second half as customers start to increase budgets,” said Pete Sorrentino, senior portfolio manager for Cincinnati-based Huntington Asset Management, which oversees $16.5 billion. Earnings at software and services companies may rise 8.1% in 2009, while profits at hardware makers may slip 6.7%, according to analysts.
Consumers may continue to curb spending in the first half, dragging down sales at Apple Inc., maker of the iPhone and Macintosh computers, David Bailey, an analyst at Goldman Sachs in New York, said last month. Google Inc., owner of the most popular search engine, will probably post a 14% increase in profit in 2009 as it clamps down on spending, according to the estimates.
“Health care will be one bright spot, as sick people still need medical treatment,” said Les Funtleyder, an analyst with Miller Tabak and Co. in New York. Profit at S&P’s 500 drug companies and medical equipment makers, such as Johnson and Johnson and Pfizer Inc., may increase 6.8% in 2009.
Health care tends to be recession-resistant, Funtleyder said. Some people may use fewer drugs, so that’s obviously a bad thing, but it’s less cyclical than other industries.
In Europe, profits at Dow Jones Stoxx 600 Index companies may fall less than 1% this year, compared with a 17% decline in 2008. Oil and gas firms face the heaviest declines, according to analysts’ estimates.
“The biggest near-term risk is how tough it’s getting overseas,” said McCain. “That’s the wild card.”
Earnings at European oil companies may drop 21% in 2009, compared with a 4.7% gain last year, according to estimates. Profit at Royal Dutch Shell Plc., Europe’s largest oil company, may drop 27%. The company postponed projects in Canada and Australia as demand for oil declined.
European retailers may post a 12% drop in earnings this year. Discounts of 70% or more during the holiday shopping season by UK stores hurt profit margins and may lead to a raft of bankruptcies, said Nick Hood at Begbies Traynor.
Nokia Oyj, the largest mobile phone maker, said last month the global handset market may contract this year for the first time since 2001. Earnings at Espoo, Finland-based Nokia could decline 14% in 2009, according to analysts’ estimates.
Half of Asia will probably be in recession this year, as a $700 billion drop in export earnings causes economies in Japan, Hong Kong, Singapore, South Korea and Taiwan to shrink, according to Macquarie Group.
Allison Abell Schwartz, Julie Hyman, Ken Prewitt, Heather Burke, Jim Polson, Josh Fineman, Peter Brennan and Eric Martin in New York; Jeff Kearns in San Francisco; David Mildenberg in Charlotte, North Carolina; Bomi Lim and Seonjin Cha in Seoul; Chan Sue Ling in Singapore; Chinmei Sung in Taipei; and Shani Raja in Sydney contributed to this story.