Profits Look Great. Just Don't Look Too Far

Flash profits are strong, but analysts see a 2001 slowdown

A glance at corporate profits in the third quarter suggests that the good times just keep on rolling: After two consecutive quarters of 20%-plus growth, BUSINESS WEEK's flash profits survey of 114 bellwether companies showed another 25% surge. In many instances, results handily beat Wall Street's expectations. "For many companies, we're not talking about a penny [a share] better than expectations," notes I/B/E/S International Inc. equity strategist Joseph Kalinowski, who predicts a 17% profit gain for the Standard & Poor's 500-stock index in the third quarter.

Despite that stellar showing by Corporate America, however, there's a growing feeling that the third quarter may stand as the high-water mark for profits. Reason: the "four Es"--energy, the euro, the election, and the economy. Indeed, many execs are growing more cautious: "I won't use the `R' word, but my mind is set around a continued slowing of the economy," notes Eastman Kodak Co. Chief Executive Daniel A. Carp.

Even as Wall Street analysts are celebrating the current quarter, they have slashed their outlook for the fourth quarter for the S&P 500, from 15.6% in early October to 12.9%, notes Charles L. Hill, director of research at First Call/Thomson Financial. And with the economy expected to trail off from the heady 6.1% rise in gross domestic product over the past four quarters to 4% or less in the coming year, Hill believes 2001 profit growth could easily slide from Wall Street's current 13.9% forecast, perhaps to around 10%. And some analysts believe the drop could be lower. Economists at Standard & Poor's DRI division, which builds earnings forecasts from broader economic trends than do most Wall Street firms, believe earnings at both public and private companies overall could rise just 2% next year. "We should see a fairly precipitous slowdown in 2001," warns Sara L. Johnson, director of North America research for DRI.

EURO SLIDE. Despite the projected 40% gain in high-tech profits this quarter, analysts have been cutting their fourth-quarter estimates from 29% to 19%. While demand remains robust in some sectors--including semiconductors, where Texas Instruments Inc. reported a 69% surge in third-quarter profits and Altera Corp. turned in a 112% earnings gain--the question is how much longer tech can deliver eye-popping gains.

Indeed, analysts note that the continuing slide in the euro is likely to take a bite out of the profits of tech companies like JDS Uniphase, Novell, and Autodesk, each of which generate 30% or more of their sales from the Continent. "If the dollar remains at current levels for the fourth quarter, the situation can only get worse," says John Joyce, chief financial officer for IBM. The bottom line: The road ahead is going to get bumpier for Corporate America.

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