{"id":79,"date":"2012-07-30T22:54:34","date_gmt":"2012-07-30T22:54:34","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=79"},"modified":"2012-08-22T18:47:53","modified_gmt":"2012-08-22T18:47:53","slug":"q2-profits-look-weak-strategists-will-cut-sp-eps","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=79","title":{"rendered":"Q2 Profits Look Weak; Strategists Will Cut S&#038;P EPS"},"content":{"rendered":"<p>In our July 9 post, <strong>Second Quarter Earnings \u2013 How Bad Will they Be?<\/strong>, we answered:\u00a0 Bad enough to\u00a0compel strategists to eventually cut their 2012 S&amp;P 500 EPS estimates from $103-$105 to $100. While $100 still seems reasonable, the tone of Q2 profits is even worse than we expected.<\/p>\n<p><strong>No Signs of Imminent U.S. Recession . . .<\/strong><\/p>\n<p>EPS results do highlight several pillars of strength that are sustaining U.S. economic growth despite weak employment and counterproductive fiscal and regulatory policy:<\/p>\n<ul>\n<li>The major regional banks (WFC, BBT, USB, PNC, etc.) are reporting decent loan growth.<\/li>\n<li>U.S. auto sales are healthy.\u00a0 Ford\u2019s North American business was solid, as were Eaton\u2019s and Alcoa\u2019s auto business.\u00a0 This is not so much\u00a0evidence of strong consumer confidence as the advanced age of the American auto fleet&#8211;it\u2019s cheaper to replace than repair that gas-guzzling old jalopy.<\/li>\n<li>The\u00a0housing sector is growing again, which boosts activity in related areas of finance, retailing, law, advertising, etc.<\/li>\n<li>Aerospace is healthy, judging from Boeing\u2019s results and Alcoa\u2019s commentary.<\/li>\n<\/ul>\n<p><strong>. . . but Some Ominous Signs of a Consumer Slowdown<\/strong><\/p>\n<p>Quite a few large, high-quality consumer companies have reported weakening demand, especially late in Q2, including McDonalds, Starbucks, Chipotle, and (earlier) Nike.\u00a0 This weakness was not across-the board\u2014VF Corp. and Six Flags were strong \u2013 but it is still worrying, particularly because it occurred while consumers were getting a small \u201ctax cut\u201d from lower gasoline and nat gas prices.<\/p>\n<p><strong>Here Come the Guidance Cuts<\/strong><\/p>\n<p>The strong dollar is a modest negative for U.S. firms, but the key driver of cuts is is slowing global growth, led by Europe.\u00a0 The U.S. is not particularly strong; Europe is in a severe and worsening recession; China is slowing; and other BRICs such as Brazil and India are sluggish.\u00a0 The situation in China is opaque and could improve, but Europe (which accounts for well over 40% of the <strong>foreign<\/strong>\u00a0sales of the S&amp;P 500) is in dire straits.\u00a0\u00a0 Consider that Spain, with 25% unemployment, just announced a new fiscal tightening package; soon France will follow suit.\u00a0 The UK is in recession, and Germany is slowing along with its export markets.\u00a0 European banks, whose balance sheets are loaded with dodgy sovereign bonds, are deleveraging by curbing lending. European companies will embark on another round of layoffs over the next few months. \u00a0A weaker Euro eventually will improve competitiveness, but this takes a long time\u2014several quarters, not a couple of months.\u00a0 And political unrest creates downside risk; even fairly innocuous street protests and strikes are enough to damage a key industry, tourism.\u00a0 (Despite Europe&#8217;s problems, the continent has many fine firms serving global markets, which could be good investments.)<\/p>\n<p><strong>Guidance Cutters<\/strong><\/p>\n<p>Here are some of the major firms that cut guidance.\u00a0 (Zacks confirms that many more firms are cutting guidance in Q2 earnings season than Q1.) Keep in mind that companies like to <strong>raise<\/strong> guidance during the course of a year, \u00a0which has been the norm since mid-2009. So this raft of cuts by big companies is extremely significant.<\/p>\n<ul>\n<li><strong>Cummins Engine<\/strong>, a high quality company with significant emerging market exposure, slashed 2012 revenue guidance about 12%.<\/li>\n<li>Chip makers <strong>Intel<\/strong> and <strong>AMD<\/strong> both cut revenue guidance, and AMD had a big earnings miss.<\/li>\n<li><strong>Coca-Cola<\/strong>&#8216;s unit growth was weak due to slowing demand in Japan, China and Brazil.<\/li>\n<li><strong>Johnson Controls<\/strong> (auto parts and building controls) had a big miss.<\/li>\n<li><strong>Dow Chemical<\/strong>, which has broad global exposure, missed estimates and slashed guidance.\u00a0 (DuPont, by contrast, largely maintained guidance while warning about soft demand.)<\/li>\n<li><strong>Texas Instruments<\/strong> issued weak guidance because \u201cthe global economic environment is causing both [customers and distributors] to become increasingly cautious in placing new orders.\u201d<\/li>\n<li><strong>Yum Brands<\/strong>, one of the most leveraged U.S. plays on Chinese consumers (they love the Colonel\u2019s chicken), reported weak results.<\/li>\n<li><strong>UPS<\/strong> cut guidance as international business was flat-to-down on a unit basis, before currency.<\/li>\n<li><strong>ITW <\/strong>and<strong> Eaton,\u00a0<\/strong>diversified industrial firms cut guidance, partly on weak foreign demand.<\/li>\n<li><strong>Ford<\/strong> cut guidance on weakness in South America, Europe and Asia.\u00a0 The company said it needs to slash capacity in Europe.<\/li>\n<li><strong>Flextronics<\/strong>, a contract manufacturer that assembles electronic devices for other companies, said demand is soft and weakened late in the quarter.<\/li>\n<li><strong>Mettler Toledo<\/strong>, which makes scales and other instruments, cut guidance and thinks local currency revenue growth will be about 4% not\u00a0 6.5%.<\/li>\n<li><strong>3M<\/strong>, widely considered a global industrial bellwether, maintained earnings guidance but cut unit growth guidance.<\/li>\n<li>Auto parts maker <strong>Borg Warner<\/strong>, with high exposure to Europe and Asia, cut guidance significantly.<\/li>\n<li><strong>United Technologies<\/strong> cut revenue guidance about 5%.<\/li>\n<li><strong>Starbucks<\/strong> cut guidance on weaker trends in the U.S. and overseas.<\/li>\n<li><strong>Las Vegas Sands<\/strong>, which operates gigantic casinos in Macau and Singapore, cut guidance.<\/li>\n<\/ul>\n<p><strong>The Cuts Will Keep on Coming<\/strong><\/p>\n<p>In our experience when macro conditions\u00a0deteriorate companies usually don\u2019t cut guidance enough the first time.\u00a0 (Financial psychologists call this \u201canchoring\u201d \u2013 people tend to be \u201canchored\u201d to their old estimates and change them slowly.)\u00a0 So I expect estimates to keep coming down for the next couple of months.\u00a0 Because much of the global economy takes August off, September comprises far more than 33% of Q3 business activity.\u00a0 Therefore we expect many negative preannouncements in the second half of September and early October.\u00a0 If this occurs, investors will start to worry about profits in 2013, the year of the fiscal cliff\u00a0\u2013 will they be $110 or $100 or $90?<\/p>\n<p><strong>Weaker Profits Means Fewer Jobs<\/strong><\/p>\n<p>Companies will respond to \u201cweak macro\u201d by restraining capital spending, hiring fewer people, and trimming payrolls.\u00a0 Europe, in particular, is in for a major round of layoffs. \u00a0The\u00a0fiscal cliff is an extra reason for caution, particularly for defense contractors and their many suppliers in the industrial and technology sectors.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In our July 9 post, Second Quarter Earnings \u2013 How Bad Will they Be?, we answered:\u00a0 Bad enough to\u00a0compel strategists to eventually cut their 2012 S&amp;P 500 EPS estimates from $103-$105 to $100. While $100 still seems reasonable, the tone &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=79\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[21,8],"class_list":["post-79","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-profits","tag-stock-market"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/79","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=79"}],"version-history":[{"count":5,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/79\/revisions"}],"predecessor-version":[{"id":81,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/79\/revisions\/81"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=79"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=79"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=79"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}