Europe’s debt crisis is putting pressure on corporate earnings globally with companies from Procter & Gamble Co. to Danone cutting forecasts and signaling profits will fall at more companies this year.
Analysts predict members of the Standard & Poor’s 500 Index in the U.S. will report a 1.1 percent average drop in second-quarter earnings, after estimating a gain as recently as last month, according to data compiled by Bloomberg. That would be the first decline in 11 quarters after a 6.2 percent average increase in the first quarter. A stronger dollar is another threat to earnings as U.S. exports become more expensive.
In Asia, the chairman at computer manufacturer Compal Electronics Inc. said last week that concern about a global slowdown is making him less optimistic about the second half of the year. Paris-based Danone lowered its 2012 profitability forecast as Spanish shoppers switch to cheaper brands of yogurt.
“There is a lot of trepidation about second-quarter earnings,” Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York, said in a June 22 interview. He oversees about $2 billion including shares of Apple Inc. and DuPont Co. “You are very unlikely to see companies coming out with favorable outlooks given the problems in Europe and the slowing growth in the U.S. and China.”
Earnings pessimism in the U.S. is reaching levels last seen during the global financial crisis of 2008 and 2009, based on company guidance. Fifty-nine corporations issued profit projections that trailed analyst estimates during the 20 days through June 22, or 3.1 times the number of those that exceeded them. The ratio has been greater than 3 for eight straight days, the longest stretch in three years. It was at least that high the majority of the time between October 2008 and April 2009, climbing to 11.5 in December 2008, the data show.
FedEx Corp., an economic bellwether because it transports phones to pharmaceuticals, last week predicted full-year earnings that trailed some analysts’ estimates. Philip Morris International Inc., the world’s largest publicly traded tobacco company, anticipates second-quarter shipments in the European Union will tumble as much as 9 percent, hurt in part by Spain’s almost 25 percent jobless rate.
“It’s the economy, the unemployment,” Andre Calantzopoulos, Philip Morris’s chief operating officer, told analysts on a June 21 conference call. “It’s the austerity measures.”
Those measures, which include eliminating 150,000 civil service jobs in Greece and cutting 11.5 billion euros ($14.5 billion) from the country’s budget, have curbed spending by consumers and businesses. In Germany, Europe’s largest economy, business confidence fell to the lowest in more than two years in June, a sign the crisis may be spreading as leaders grapple with bailing out Greece, Spain and Italy.
P&G, the world’s largest consumer-goods company, cut its earnings and revenue forecasts last week for the second time in fewer than two months. For the fiscal fourth quarter ending this month, earnings per share excluding some items will be as much as 79 cents, down from a previous forecast for a maximum of 85 cents, Cincinnati-based P&G said. A year earlier, P&G reported adjusted earnings of 84 cents a share.
“There’s been slow to no GDP growth in developed markets and significant levels of unemployment in the United States and in Europe,” Chief Executive Officer Robert McDonald said at a June 20 investor conference in Paris. The company, whose brands include Tide detergent and Gillette razors, also attributed the reduced forecast to currency losses as overseas earnings carry less value when converted into dollars.
Through June 22, the dollar has gained 6.5 percent against seven major currencies since April 30, according to the Federal Reserve’s U.S. Trade-Weighted Major Currency Dollar Index. Also, for the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies, while the the yuan has depreciated more than in any other period since its 1994 devaluation.
New York-based Philip Morris cut its full-year earnings forecast to $5.10 to $5.20 a share, from an April prediction of $5.20 to $5.30, citing the dollar’s strength. The maker of Marlboro cigarettes generates all of its sales outside of the U.S.
Philip Morris “is just a canary in the coal mine for many others who are going to use currencies as an excuse or legitimate reason” for declining profit, said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion.
Adding to executives’ concerns, U.S. hiring shows no signs of a rebound this year, Federal Reserve officials said last week in reducing their projections for 2012 growth. The Fed pared its estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent, down from a 2.4 percent to 2.9 percent prediction in April.
FedEx’s projections for GDP growth of 2.2 percent in the U.S. and 2.4 percent globally this calendar year assume “the successful management of the debt crisis in Europe and the avoidance of significant tax increases next year in the U.S.,” Michael Glenn, CEO of the FedEx Corporate Services unit, said on a June 19 conference call.
Memphis, Tennessee-based FedEx, operator of the world’s largest cargo airline, predicted profit will rise to $6.90 to $7.40 a share for the fiscal year through May 2013, compared with an average analyst estimate of $7.38.
Passenger airlines are also suffering. While Europe’s three biggest carriers have avoided giving specific forecasts for 2012, the International Air Transport Association almost doubled its loss prediction for European airlines to $1.1 billion. Cathay Pacific Airways Ltd., Asia’s largest international carrier, cut flights to North America and Europe this year, imposed a hiring freeze on ground staff and offered cabin crew unpaid leave after predicting “disappointing” first-half earnings.
“Everybody is worrying about the slowing world economy,” John Slosar, CEO of Cathay Pacific, said June 11 at the IATA annual meeting in Beijing.
Europe’s debt crisis has led Taipei-based Compal Electronics to become more conservative, according to Chairman Rock Hsu. Compal is the world’s second-largest contract maker of laptop computers, with clients including Dell Inc., Hewlett-Packard Co. and Asustek Computer Inc.
“Compared to three months ago we’re not as optimistic toward the second half because market conditions are not as strong,” Hsu said in a June 22 interview. “We didn’t originally expect any growth from Europe, yet we’re now worried that conditions there will flow through to impact Asia.”
U.S. companies lowering forecasts last week included truck-rental company Ryder System Inc. and home-goods retailer Bed Bath & Beyond Inc., leading to stock declines.
The S&P 500 Index had tumbled 5.9 percent through June 22 since hitting a four-year high April 2, and the MSCI World Index had slumped 9 percent during that same period. The MSCI lost another 1.4 percent in trading today.
Europe’s crisis may worsen unless leaders agree on a unified plan for the region, according to Dan Akerson, CEO of General Motors Co., the world’s largest automaker. The situation in Europe is “at best stable,” Akerson said in a telephone interview while in St. Petersburg, Russia, on June 21.
“My expectation is that if Europe experiences a recession, I think the U.S. can kind of manage its way through it,” Akerson said. “If there were divides in the union, if the euro were to go away, then I think it’s anybody’s guess what the implications would be for the U.S., for the rest of the world, quite frankly.”