It's Rough All Over

Virtually every sector will take a hit in earnings

It's no secret that the terrorist attacks on Sept. 11 devastated airlines, insurers, travel agents, and stockbrokers. But that may be just the beginning. It's becoming increasingly clear that the damage will extend across almost the entire spectrum of U.S. business, from energy and manufacturing to technology, retailing, and autos. Even before the attacks, 2001 was shaping up to be a terrible year for corporate profits. Now, earnings threaten to show "the sharpest drop we've ever seen" in the postwar era, warns David A. Wyss, chief economist for Standard & Poor's Corp.

If Wyss is right, full-year earnings for the S&P 500-stock index could plunge a breathtaking 31% from last year's record levels. And he has plenty of company. The consensus of 16 Wall Street strategists surveyed by First Call/Thomson Financial forecasts that earnings will plunge 28% in the third quarter and 23% in the fourth quarter. That compares with estimated drops of 18% and 9% prior to Sept. 11.

Prospects for corporate earnings, of course, will depend largely on consumers' willingness to spend. On Sept. 25, the Conference Board reported that its consumer confidence index plunged to 97.6 in the wake of the attack, from 114 in August, the lowest reading since 1990. Those numbers are only likely to head lower as corporations further retrench to cut costs. Indeed, Wyss predicts that companies will shed 2 million net jobs in the coming months, or 1.25 million more than he expected prior to Sept. 11. That could drive the unemployment rate to 6.5% by mid-2002, from 4.9% in August.

As long as the downward spiral continues, virtually every industry will be hurt. Some will feel the pain more than others, and a few could skirt by unscathed. But for most, as the economy weakens, it will be nearly impossible to escape a hit to the bottom line. Indeed, the rest of this year and possibly well into next year are likely to prove deeply sobering for U.S. businesses. Here's the new outlook for several key industries:


Nowhere had the economy been hurting more than in the tech sector. Spending in the $450 billion information-technology industry had already slowed well before the attacks. But now, IDC predicts that spending will climb just 3% this year, down from 11% last year and the 6.7% expected for this year prior to Sept. 11. "Hang on, everybody," warns Sun Microsystems Inc. Chairman Scott G. McNealy. "The economy is going to throw us around, and whoever survives the turbulence will be a leader."

The next two quarters will be especially brutal. First Call now estimates that earnings for the tech sector will fall 86% for the third quarter, with an additional 56% drop in the fourth quarter. In part, that's because customers typically lock in sales of expensive items such as computer servers at the end of a quarter. Since Sept. 11, many of those deals have been put on indefinite hold.

As a result, on Sept. 20, data-storage king EMC Corp. was forced to warn that it will no longer meet its goal of $1.8 billion in third-quarter revenues, its breakeven point. In response, it is trimming 2,400 more jobs, or 10% of its staff. And Oracle Corp. Chief Financial Officer Jeff Henley warned on Sept. 17 that he now expects software-license revenues to slip as much as 15% in the company's next quarter, nearly twice the drop that was expected before the attacks. "Many companies are going to have a very difficult time," says Henley.

Personal-computer makers had counted on the rollout of Microsoft Corp.'s new operating system, Windows XP, to rev up sales. But now, Charles Wolf, an analyst at Needham & Co., expects PC shipments to fall 5.6% in the third quarter and 8.1% in the fourth. Previously, he had expected increases for both of those quarters. That will decimate earnings. First Call now pegs a third-quarter earnings drop for computer makers at 56%, with a 29% fall in the fourth. The already struggling semiconductor manufacturers will feel more heat, too: Analysts estimate that their earnings will be off 104% in the third quarter and an additional 95% in the fourth. Even software, which had held up pretty well despite the slowing economy, now faces a hit as corporate buyers retrench.


Since anxious consumers are especially likely to hold off on big-ticket purchases, Morgan Stanley Dean Witter auto analyst Stephen J. Girsky predicts that car sales will slump to 16.1 million vehicles this year, down from 17 million last year and the 16.8 million he expected prior to Sept. 11. And for 2002, he expects sales of just 15.2 million. "The impacton the U.S. auto sector is devastating," adds Merrill Lynch & Co. analyst John Casesa, who is predicting that all three auto giants will likely have to cut their dividends.

To get shoppers back into showrooms, the Big Three are all offering interest-free loans on most 2002 model cars and trucks. But because such expensive incentives only compound their profitability problems, "these companies will have to move faster and more aggressively to restructure their businesses," says Casesa. Ford Motor Co. (F ) is now expected to cut even deeper into its workforce. According to First Call, analysts who have updated estimates since Sept. 11 now believe Ford will lose $274 million in the third quarter. They also estimate that Ford will earn just $604 million this year, down from $3.5 billion last year, and less than of half what was expected before the attacks. And estimates for General Motors Corp. (GM ) now peg earnings at just $2 billion this year, down from $5 billion last year.

At Chrysler Group (DCX ), which cut 26,000 jobs in February, "the turnaround could be in jeopardy," says Deutsche Bank Alex. Brown analyst Rod Lache. Because Chrysler is still losing market share, more layoffs are possible, and its recovery will almost certainly be delayed.


Fall is typically a season of hope for retailers. Back in early September, industry leaders were betting that sales would gain momentum through the fall, setting the stage for an earnings rebound. But for most retailers, those hopes collapsed along with the Twin Towers. Instead, with consumer confidence plunging, they're bracing for a brutally tough Christmas. On Sept. 20, PricewaterhouseCoopers LLP warned that retail sales will rise just 1.5% in the fourth quarter, just a third of last year's gain and even lower than the 1.8% posted in the 1991 recession. The terrorist attacks "could not have come at a worse time," says Robert Buchanan, a retail analyst at A.G. Edwards & Sons Inc. (AGE ), who last week slashed third-quarter earnings estimates for almost every retailer he covers by an average of 16%. Indeed, nearly all retailers will be down compared with year-ago levels.

Some retailers will fare far worse than others, however, especially upscale stores. "The Bermuda Triangle of retailers for the holidays will be full-service department stores, specialty apparel retailers, and fine jewelry stores," predicts Burt Flickinger III, a consultant at Reach Marketing in Westport, Conn. He expects double-digit earnings declines at such retailers as Gap, Abercrombie & Fitch, and Saks. Conversely, analyst Buchanan has reduced estimates for Wal-Mart Stores Inc. (WMT ) just 3% because it sells so many basics that people must buy. Similarly, home-improvement retailers such as Home Depot Inc. and Lowes Corp. may also be well positioned as people stick close to home.


Another sector that was well into a slowdown before Sept. 11, manufacturing is also bracing for deeper trouble. Boeing Co. (BA ), of course, is among the hardest hit: Several analysts expect its earnings to fall 35% next year. "Never in our wildest dreams did we believe we'd be in this kind of situation," says Alan R. Mulally, CEO of Boeing Commercial Airplane. "This is absolutely gut-wrenching."

Scores of other manufacturers are also hurting. "No one wants to make a decision" on major capital projects, says S&P's Wyss, who predicts that spending on business equipment will fall 2% more next year from this year's levels instead of rising 6% to 7% as he had expected prior to Sept 11. As a result, "we expect slower earnings across the board into mid-2002," says David S. MacGregor, managing director at MidWest Research. On Sept. 26, UBS Warburg analyst David Bleustein cut his 2002 earnings forecasts for all of the bellwether heavy manufacturers, including Caterpillar, Deere, and Ingersoll-Rand. And the mood in steel is pitch-black. "This industry is devastated," says Keith F. Busse, CEO of Steel Dynamics, "and there could be a lot of pain and agony ahead."


The energy industry has also seen its prospects take a dramatic dive. With a recession expected to trim worldwide oil demand 1% next year, crude, gasoline, and other energy prices have been plummeting. And with OPEC bowing to U.S. pressure to not cut production at its Sept. 26 meeting, analysts expect earnings to fall in the second half of the year to at least 20%. Conoco Inc. (COC ) and Kerr-McGee Corp. (KMD ) have already issued third-quarter earnings warnings. And Apache Corp. (APA ) is pledging to reduce its drilling activity in order to cut costs. "This is not a good thing for anybody's economy," says Unocal Corp. President Timothy Ling.


Health care is one of the rare industries that could continue to prosper. "People still get sick and need to take drugs," says Stephen M. Scala, a pharmaceutical analyst at SG Cowen Securities Corp., who adds: "I haven't changed a single earnings estimate since Sept. 11." Scala still expects drug companies to see earnings increases of 14% in the fourth quarter.

For all the near-term gloom, most analysts expect earnings to begin rebounding by the second half of next year. Indeed, heavier-than-expected federal spending and deeper interest-rate cuts could provide a bigger stimulative kick. And even in the hardest-hit industries, restructuring could set the stage for vigorous recovery. Among insurers, for example, those that can weather the downturn "will face less competition and have tremendous pricing power," says Jon Laupheimer, director of research for MFS Investment Management in Boston.

That's a comforting thought for investors. But first, companies--and thousands of their soon-to-be-former employees--must endure enormous pain.

By William C. Symonds in Boston and Ira Sager in New York, with Joann Muller in Detroit, Louise Lee in San Mateo, Calif., and Christopher Palmeri in Los Angeles

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