Profits: Suddenly, The Downpour

Oil prices and the slowdown make for a grim earnings outlook

Forget the debate over the economy. Even if Federal Reserve Chairman Alan Greenspan keeps the economy on track by cutting interest rates again, these moves won't come soon enough to head off the storm that's starting to roll across Corporate America. Thanks to the one-two punch of soaring energy costs and plunging consumer confidence, BusinessWeek's flash profits survey of 114 bellwether companies shows that fourth-quarter 2000 profits rose a mere 0.8%. Excluding energy companies and utilities, profits for the group fell 9.2%.

What's more, the fourth quarter isn't likely to be an aberration. While more Fed rate cuts could provide relief to banks, brokerages, and other rate-sensitive sectors such as housing, they won't offer any immediate help to other companies. "It takes six months for interest rates to play through for us," says James W. Anderson, head of investor relations at Caterpillar Inc. As a result, many forecasters predict that corporate profits could dip for at least the next two quarters. "This is going to be the toughest earnings period since the [1991] recession," notes Mark M. Zandi, chief economist at Inc., a Philadelphia consulting firm.

What's most striking is how quickly profits growth slowed in the fourth quarter--particularly given the 18%-plus average earnings gain recorded by companies in the Standard & Poor's 500-stock index in each of the preceding three quarters. "The magnitude [of the slowdown] was greater than we anticipated," says W. James McNerney Jr. CEO at 3M. Profits at 3M tumbled 10% after one-time charges in the fourth quarter. And companies like Eastman Kodak Co. that are still projecting growth during 2001 aren't doing so with the same conviction as before. "We're all trying to look through the fuzziest crystal ball we've ever had," admits Kodak CEO Daniel A. Carp.

SLOW BUILD. The slowdown is particularly pronounced in the technology sector. After a robust 34% rise during the third quarter, Wall Street analysts had expected tech profits to climb 29% in the fourth quarter. Now, however, the consensus is that tech profits will rise just 2%.

Without technology to propel the rest of Corporate America, Charles L. Hill, research director at First Call/Thomson Financial, believes profits could be down in both the first and second quarters--and perhaps the third quarter of 2001 as well. "We're starting to see less trimming and more slashing of third-quarter earnings estimates," notes Hill.

Despite the current gloom, many Wall Street pros remain bullish about the outlook for later this year. Among the reasons for optimism: tax relief from the Bush Administration, a decline in the dollar that helps exporters, and--not least--more rate cuts. "You can't underestimate the power of the Fed," says John Forelli, portfolio manager at Boston's Independence Investment Associates. He may be right. But if it takes until fall for Greenspan's medicine to work, it could be a long dry spell for many companies.

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