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European Profit Estimates Cut Most Since 2009 as Danone Hit

Europe Profit Estimates Cut Most Since 2009 as Danone Hit
Danone yoghurts, including the Activia brand, sit on display. Photographer: Balint Porneczi/Bloomberg

Analysts are cutting European profit forecasts at the fastest rate since 2009 as the region heads for a recession and growth in China slows for a sixth quarter.

Euro Stoxx 50 Index companies will earn 240 euros a share in 2012, 6.8 percent more than in 2011, according to more than 12,000 estimates compiled by Bloomberg. That compares with a 19 percent gain predicted at the start of the year. The reduction is the biggest since 2009, when analysts trimmed by 42 percentage points. ASML Holding NV started the European earnings season with its results today as at least seven companies in the broader Stoxx Europe 600 disappointed.

While Bloomberg data show analysts lowered projections for 32 members of the Euro Stoxx 50 this month, there may be more cuts to come. Corporations from French dairy producer Danone SA to SKF AB, the world’s largest maker of ball bearings, have reduced their forecasts and strategists at Macquarie Group Ltd. and Morgan Stanley, who base their predictions on the economy rather than individual companies, say earnings will drop as much as 10 percent this year.

“The environment is becoming more challenging,” Frances Hudson, who helps manage about $250 billion at Standard Life Investments in Edinburgh, said in a phone interview. “A lot of companies have felt they have to sit on a pile of cash and that doesn’t feed into superior earnings either. I wouldn’t have terribly high hopes for this earnings season.”

Valuation Climbs

The Euro Stoxx 50 has gained 8.8 percent since the start of last month. The gauge is trading at 9.4 times projected earnings, up from 8.3 times on June 1, data compiled by Bloomberg show. The valuation has averaged 10.3 since 2007. The index rose 1.5 percent to 2,284.7 today.

More than two years since Europe’s debt crisis erupted with the first bailout of Greece, the region’s economy is slowing amid government austerity measures and rising bond yields. A decline in U.S. hiring and weakening gains in Chinese imports this month added to concern that the global recovery is losing momentum.

ASML was the first member of the Euro Stoxx 50 to report second-quarter results. Europe’s biggest maker of semiconductor equipment recorded second-quarter order bookings that beat analysts’ estimates today, while forecasting a decline in revenue for the second half of the year.

Earnings at companies in the index declined 38 percent in 2008 and 9.6 percent in 2009, Bloomberg data show. They rose 28 percent in 2010 before falling 9 percent last year.

Technology Producers

In the larger Stoxx Europe 600 Index, basic-resources companies, technology producers and banks have had profit estimates lowered by an average of 21 percent in 2012, the biggest reductions, according to Bloomberg data. A gauge of financial-services companies, including Deutsche Boerse AG and ICAP Plc, had the biggest upgrades, the data show.

“This slowdown is reaching into very different industries and countries, and all the while consensus is still telling us that earnings will grow,” Laurent Ducoin, a fund manager who helps oversee $13 billion at Carmignac Gestion in Paris, said in an interview on July 13.

Euro-area gross domestic product will shrink in the final three quarters of 2012, resulting in a 0.4 percent annual contraction, according to the median forecast in a survey of 43 economists by Bloomberg.

The average earnings-growth estimate for companies in the Standard & Poor’s 500 Index has fallen to 13 percent from 14 percent in January, Bloomberg data show. Estimates for the MSCI World Index have dropped to 9.5 percent from 13 percent.

Pace Easing

The pace of profit downgrades in Europe may be easing, according to Garry Evans at HSBC Holdings Plc. Analysts’ forecasts for Euro Stoxx 50 earnings in 2012 have fallen less than 0.1 percent in July, according to Bloomberg data. That would be the smallest monthly reduction this year.

“We think we are now through the worst of the European downgrade cycle,” Evans, a Hong Kong-based strategist at HSBC, wrote in a report distributed July 3. “A combination of a shallow European recession and slowing, but still decent, global growth suggest that our target for European EPS growth of zero to 5 percent is in the right ballpark.”

SKF said June 13 it will cut 400 jobs amid weaker demand for products and services in western Europe and Asia in the second quarter, sending shares of the Gothenburg, Sweden-based company down 7.3 percent. Six days later, Paris-based Danone, the world’s biggest yogurt maker, cut its profitability forecast after Spanish consumers switched to less-expensive products and raw-material costs rose. The stock fell the most in three years.

Burberry Sales

Shares of London-based Burberry Group Plc tumbled 7.4 percent on July 11 after the U.K.’s largest luxury-goods company reported sales that missed analysts’ estimates.

Cie. de Saint-Gobain SA Chief Executive Officer Pierre-Andre de Chalendar said June 7 that first-half results at Europe’s biggest supplier of building materials may be lower than in the year-earlier period as car sales recede and the construction market in southern Europe struggles. The Paris-based company is forecast to earn 3.11 euros a share this year, down from 3.50 euros at the start of January, according to analyst projections compiled by Bloomberg.

Analysts expect Ludwigshafen, Germany-based BASF SE to earn 5.63 euros a share this year, down from 5.93 euros on May 1, according to estimates compiled by Bloomberg. Societe Generale SA analysts Peter Clark and Patrick Lambert reduced their forecast by 8 percent to 5.40 euros on July 9, citing slower Asian growth.

Strategist Forecasts

Daniel McCormack, a strategist at Macquarie, estimates earnings in Europe will drop 10 percent in 2012. Morgan Stanley strategists Graham Secker, Ronan Carr and Matthew Garman expect an 8 percent contraction. JPMorgan Chase & Co. forecasts a 5 percent decline.

“The overall earnings picture for companies globally cannot decouple from the underlying macro slowdown,” Andreas Utermann, Frankfurt-based global chief investment officer at Allianz Global Investors, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua on July 12. His company oversees about $305 billion. “We will see quite a few disappointments. I’m convinced of that.”

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