Now, Profits Are In Free Fall

And with the sharp drop-off in consumer confidence, many analysts are warning that earnings may grow even more bleak

For all the gloom over the economy this summer, many Wall Street pros were holding out hope that the U.S. could avoid a recession. As recently as early September, they were still betting that key pillars could continue to hold the economy up. Homebuilders and some other cyclical industries that usually collapse first in a downturn were standing firm this time, thanks largely to six Fed rate cuts that bolstered demand.

September 11 changed all that. The economy plunged into a full-blown recession -- and already weak corporate profits have gone into a broad free fall. How bad is it? BusinessWeek's flash-profits survey of 124 bellwether companies showed a 54% slide in third-quarter profits -- the sharpest quarterly decline recorded in BusinessWeek profit surveys in more than a quarter-century.


  Things are likely to get worse before they get better. Given the sharp drop-off in consumer confidence, most Wall Street forecasters have grown more pessimistic. Not only do they see fourth-quarter profits falling 20% more but it may take until third quarter 2002 before the economy recovers and profits start to head up again (see BW Online, 10/26/01, "What's Driving the Market?"). Some companies, including Boeing Co., are warning that the start of their recoveries could be pushed into 2003. "It now looks like the profits recession will be deeper and longer than we anticipated," says Edward Yardeni, chief investment strategist for Deutsche Banc Alex. Brown.

Indeed, the falloff in consumer spending has completely tamped sales growth as well. Overall revenues are now expected to be flat in the quarter, down from 8% growth in the second quarter. Among those hit were 3M Corp., which reported a 7% drop in third-quarter sales, to $3.97 billion. Worse, 3M officials warn that revenues may fall 3% to 7% more in the fourth quarter. "This is really unprecedented in that there is nowhere to hide, other than our health-care business, these days," says 3M's Chief Financial Officer Robert J. Burgstahler.

The pain is shared broadly. Only one sector -- health care -- is poised to record growth in the third quarter. Pacing the group is Pfizer Inc. Strong sales of its anticholesterol drug Lipitor boosted profits 52%, to $2 billion.


  For the third quarter in a row, tech and telecommunications proved the biggest laggards. Much blame goes to Lucent Technologies Inc., which posted a $7.3 billion loss, largely from restructuring charges. Meanwhile, falling sales and a price war with rival Advanced Micro Devices sent Intel Corp.'s profits tumbling 96%, to $106 million.

Many interest-sensitive companies are also seeing business crumble. Bad loans sent profits at Bank of America Corp. down 54%. And even though a flood of rebates and cut-rate financing offers are helping Detroit move inventory, they're coming at a huge cost. Ford Motor Co. recorded a $692 million loss, while General Motors Corp. saw profits sink 54%, to $385 million. "We're poised to do well with market share," says GM Chief Financial Officer John M. Devine. Still, "that doesn't help us with profits in the short term."

What does it all mean? Charles L. Hill, director of research at First Call/Thomson Financial notes that if the profits drought stretches into next year, it would match the 1951-52 period as the only six-quarter downturn in modern history. That's a dubious distinction many executives would prefer to avoid.

By Dean Foust in Atlanta, with Michael Arndt in Chicago, David Welch in Detroit, and bureau reports

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