Corporate profits probably rose to a record last quarter, with demand for items from Caterpillar Inc. equipment to Daimler AG cars holding up so far in the face of supply disruptions from the earthquake in Japan. The estimates six months out may prove too rosy, investors said.
Earnings for Standard & Poor’s 500 Index companies probably gained 12 percent in the three months ended March 31, from a year earlier, according to analysts’ estimates compiled by Bloomberg. Profits of Stoxx Europe 600 Index companies likely increased 21 percent.
Companies around the world such as Caterpillar, Daimler and DuPont Co. slashed operating costs during the recession and haven’t increased them as fast as sales rebounded. Except for Japan, where the March 11 disaster curbed production for companies including Toyota Motor Corp. and Sony Corp., first-quarter earnings improved on the back of a global economic recovery.
“The rest of the world is in fairly good shape and actually is booming,” said Chad Deakins, an Atlanta-based manager of an international equity fund for Ridgeworth Capital Management, which oversees $45 billion. “I think we have three to six months of relatively good numbers and then we might see some moderation.”
For the second quarter, most analysts have left unchanged their earnings estimates, calling for another 12 percent increase at S&P companies, the data show. For the year, they predict a gain of 17 percent.
That may be too much, investors said. Companies that outsource hardware assembly including Apple Inc., Motorola Mobility Holdings Inc. and Nokia Oyj are going to be in a “crunch” because of the quake, said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati.
“It will definitely mean higher component costs,” he said. And retailers such as Best Buy Co. may see shortfalls as crimped supply makes it more difficult to deliver to consumers starting in the third quarter, he said.
The magnitude-9 earthquake that triggered a tsunami and left more than 27,000 people presumed dead or missing pushed Japan to the brink of nuclear disaster, forced plants to close and sent the yen to a post-World War II high versus the dollar.
Canon Inc., the world’s largest camera maker, may see earnings drop 27 percent this year because of damaged factories and choked component supply, said Barclays Plc analyst Masahiro Nakanomyo in Tokyo. Sony may stagger the global release of its new PlayStation Portable game machine, and Hitachi Ltd., Japan’s second-largest builder of nuclear reactors, said it may take more than six months to calculate its damages.
Operating profit, or sales minus the cost of goods sold and administrative expenses, at seven Japanese consumer electronics makers including Sony, Pioneer Corp., Sharp Corp. and Funai Electric Co. may decline 31 percent in the six months to Sept. 30, Barclays analyst Yuji Fujimori wrote in an April 7 report.
“There are many causes for concern, with a cooling in consumer spending in Japan mentioned by Sharp and Panasonic and earthquake damage to production facilities at Sony, and as such the picture looks likely to be particularly difficult in” the first half of the current fiscal year, said Shiro Mikoshiba, an analyst at Nomura Holdings Inc. Guidance from the companies for the year “could well be bleak, factoring in maximum risks.”
Sony, Japan’s biggest exporter of consumer electronics, is expected to report a loss for its fiscal quarter ended in March of 55 cents a share, the average of four analysts’ estimates. That compares with a loss of 62 cents a year earlier. As of April 6, Sony had said two of its plants in Japan were still closed including one that makes Blu-ray discs and magnetic tape and another that produces lithium-ion batteries.
Technology, Car Companies
The effects to companies outside of Japan will be limited mostly to the technology and automobile industries and won’t show up in earnings statements until the second quarter, said Keith Wirtz, who helps manage $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati.
Grammer AG, the German supplier of interiors for Daimler and Bayerische Motoren Werke AG, said order cancellations are possible. Chertsey, England-based Compass Group Plc, the world’s largest catering company, said some closures of operations in Japan may reduce first-half profit. European ports including Rotterdam and Hamburg have said volumes will begin to be affected this month as dockside stockpiles are depleted.
In the U.S., software makers Oracle Corp. and Adobe Systems Inc. may also lose sales because of Japan, analysts have said.
‘Better Than Expected’
Alcoa Inc., the biggest U.S. aluminum producer, is scheduled to release first-quarter earnings after the market close today, the first member of the Dow Jones Industrial Average to report. An average 15 percent aluminum price increase in the quarter likely spurred the New York-based company’s profit to 27 cents a share from 10 cents a year earlier excluding certain costs, according to analysts’ estimates.
Increased spending in the U.S. and Europe and rising wealth in China and Brazil probably helped European automakers, said Adam Hull, an analyst at WestLB in London. Germany’s Volkswagen AG, BMW and Daimler are targeting record earnings in 2011 as the global economic recovery boosts demand for luxury cars, he said.
“It’s pretty good top line growth for the first quarter and a bit better than expected,” Hull said. “It’s going pretty well, but with some question marks going into the second quarter.”
Siemens AG, Europe’s biggest industrial company, raised some of those questions. Chief Financial Officer Joe Kaeser said on an April 5 call with analysts that the Munich-based company expects to report a “significant” gain in sales for its fiscal second quarter ended March 31 while anticipating “easing” of growth in the second half of the year.
“I’d be surprised if anyone claimed it was an easy operating environment with the events in Japan and Middle East,” said Frances Hudson, who helps oversee about $242 billion as a global asset strategist at Standard Life Investments in Edinburgh. “I’d be looking for companies that are able to give good outlook statements and for companies that are doing sensible things with their cash.”
In the U.S., S&P earnings will be helped by crude oil prices, which benefited Exxon Mobil Corp., the largest-weighted company in the index, and Chevron Corp., the third-biggest, said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. Crude jumped 17 percent to $106.72 a barrel in the first quarter on the New York Mercantile Exchange amid political unrest in oil-exporting nations in the Middle East and northern Africa.
Oil, Copper, Steel
Exxon, based in Irving Texas, will likely post earnings per share of $1.96 excluding some items, up from $1.37 a year earlier, according to 16 analysts surveyed by Bloomberg. San Ramon, California-based Chevron’s profit will jump to $2.89, from about $2.36.
Rising prices for commodities including oil, copper and steel won’t squeeze U.S. profit margins too much as long as wage inflation is in check, Paulsen said.
“Until you get into wages, I don’t think you get serious margin compression,” Paulsen said.
Profit growth, excluding financial companies, has been slowing after reaching a 12-year high of 40 percent in the second quarter last year. That was to be expected because year-over-year comparisons are now based on earnings that had recovered in 2010, said Gina Martin Adams, an equity analyst with Wells Fargo Securities LLC in New York.
An S&P earnings growth forecast, less financials, at 12.3 percent for the first quarter is above the average of 9.5 percent since Bloomberg began keeping records in 1998.
“We’re still in steady growth mode as would be consistent with the early part of an economic cycle,” Martin Adams said. “It’s really more of a question of how much can companies sustain margin amid all this commodity pressure.”
Delta Air Lines Inc. expects to pay $400 million more for fuel in the first quarter compared with a year earlier, and President Ed Bastian forecast a $250 million to $400 million effect from the Japan disaster in the next few months.
Nine of the largest U.S. air carriers led by Chicago-based United Continental Holdings Inc. and Atlanta-based Delta may have a combined first-quarter loss of $1.1 billion excluding one-time items, said Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut.
The S&P 500 rose 5.4 percent in the three months ended in March. The Stoxx Europe 600 advanced less than 1 percent.
Earthquake disruptions may put at risk $157 million of sales at Oracle, the largest maker of database software, for the quarter ending in May, said Pat Walravens, an analyst with JPMorgan Chase & Co. Japan represented 5 percent of Redwood City, California-based Oracle’s sales last fiscal year, he said.
Adobe, the largest maker of graphic-design software, pared its sales forecast for the quarter ending in May by $50 million because of Japan. Profit at the San Jose, California-based company is projected to rise to 51 cents a share for the period, estimates show, up from 31 cents.
The Organization for Economic Cooperation and Development said last week that an economic recovery among the world’s most advanced economies is strengthening and called faster inflation a threat. Instability in the Middle East, possible increases in oil prices and Europe’s sovereign-debt crisis also may challenge economic prospects, the Paris-based organization said.
DuPont and Dow Chemical Co. are benefiting from rising crop prices as farmers buy pesticides and biotechnology seeds, said Hassan Ahmed, a New York-based analyst at Alembic Global Advisors. The chemical makers may show expanding profit margins as their product prices rise faster than input costs, he said.
“I’m expecting a pretty good quarter across the board,” Ahmed said.
DuPont’s first-quarter profit may have risen to $1.37 a share, from $1.24, analyst estimates show. Dow Chemical’s net income likely jumped to 66 cents from 41 cents.
Caterpillar, the world’s largest construction-equipment maker, may report an increase in net income to $1.29 a share, the average of eight estimates, from 36 cents a year earlier. Revenue at the Peoria, Illinois-based company likely rose about 38 percent to $11.3 billion.
Rising sales will push more companies to pursue capacity expansions and acquisitions, Wirtz of Fifth Third said. Texas Instruments Inc.’s offer last week to pay $6.5 billion for National Semiconductor Corp., and Caterpillar’s $8.6 billion pending purchase of mining-equipment maker Bucyrus International Inc. are only a start, he said.
“We going to see a lot of deals announced this year and next year just because companies are so flush on the balance sheet and they need to deploy that excess cash,” Wirtz said.