WRFest 20Apr08(Business): Price X Units - Cost = Profit
Welll the arguement is running, on the one hand, that we're getting mixed messages on the earnings front(s). We're not so sure about that. Rather it might be that it's early in the downturn on the one hand. And on the other they aren't being parsed out very well. In fact that explains the headline because all too often analysts and other forget how these things work at their most basic. Earnings = Profits. And Profits = Revenue - Costs. The two things that aren't generally being asked are what's going on underneath that with currency translations and with sales. Consider Revenue = Price X Units. Now the few good earnings stories, so-called bearing in mind for example Intel's expectations adjusting manuvers beforehand, turn out on inspection to have more to do with foreign sales benefiting by the drop in the dollar. So the real questions are what are earnings quality when that's allowed for ? In other words what were unitl sales abroad and domestically ? What prices did you get in local currency terms ? And that also should lead one to ask how're costs doing ?
Below we provide some excerpts on general business conditions, including Goldman's very negative outlook and the rising risks of bankruptcies and then then look at the Materials and Manfucturing sectors. The themes we're seeing are that companies with significant foreign sales are getting major currency translation benefits but real sales are less clear. Those more domestically focused are experiencing the US downturn which is likely to catch up with the foreign revenues (units) in the future. At the same time everybody's experiencing rapidly rising costs which are difficult to pass along. So for example Aloca took a big hit. Unless of course you're in industries where demand > supply and you aren't subject to so much pricing pressure. Surprise, surprise that describes many of the materials companies. On the whole that all suggests that domestic earnings will continue down with the downturn while foreign earnings are exposed to the same factors in the future. And everybody's exposed to severe cost pressures.
The bottomlines are just that - few fancy manuvers left. Now it's about capabilities, good products, good management and execution. We're likely to see some severe sorting going on here between survivors, hangers on and the walking dead. The winners though, ah that's another question. Keep an eye out for those. (Performance Assessment Basics: Five Fundamental Factors)
Business
Recession Has Bernanke, Greenspan Agreeing U.S. Companies Loaded With Cash The U.S. economy has what Alan Greenspan calls one ``major advantage'' as it falls into a recession: Businesses are in far better financial shape than they were entering the past two contractions. Corporations outside of financial services -- from Cisco Systems Inc. to Coca-Cola Co. -- have collectively socked away more than half a trillion dollars in cash. They have also reduced short-term debt and cut inventories to record-low levels in relation to sales, leaving them better prepared than in the past to weather a contraction. Greenspan describes a ``tug-of-war'' between healthy non- financial companies on one hand and the crippled credit market and housing industry on the other. He says he isn't sure which will prevail, and the economy might continue to struggle well into the second half of the year. Greenspan's tug-of-war is evident at General Electric Co. The world's third-largest company last week reported its first quarterly profit decline since 2003 as disappointing earnings from its commercial-finance unit outweighed strong revenue from large-equipment manufacturing. Fairfield, Connecticut-based GE forecast a drop in financial earnings for the year and a gain of 10 percent to 15 percent in profit from other parts of the business. Non-financial companies are well-positioned now because they kept firm control of spending during the expansion. Behind the restraint are company executives' memories of the collapse in profits in the 2001 recession, when operating earnings per share for the Standard & Poor's 500 fell 30 percent.Bankruptcies Rise as Credit Runs Out for Firms `That Should Have Failed' U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit. The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies. The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries. The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, says Standard & Poor's, based on loans trading below 80 percent of their face value. The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co., speaking at a Feb. 28 conference on distressed investing in New York. ``Subprime was just a paradigm for the credit markets overall,'' Maxwell said. ``Now in the corporate market, the shoe is just beginning to fall, and we're poised for a major correction that has been coming for at least a decade.'' Bankruptcy filings have just begun to increase.
Goldman Strategist Says U.S. Earnings Are `Awful,' Will Pull Down S&P 500 will drop as companies slash forecasts for the rest of 2008. ``Early signs are awful,'' a team led by David Kostin, Goldman's New York-based U.S. investment strategist, wrote in a report today. ``We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.'' Kostin, 44, said last month that the S&P 500 may fall to 1,160 in the ``near term'' before rebounding to 1,380 by December, making Kostin among the most bearish Wall Street strategists tracked by Bloomberg.
Materials
ArcelorMittal to Increase U.S. Prices by $250 a Ton (Update1) ArcelorMittal, the world's largest steelmaker, plans to boost prices on some contracted steel shipments in the U.S. by $250 a ton to recoup surging costs for energy and iron ore. ArcelorMittal wants to take advantage of soaring global demand to pass on higher costs for iron ore, the main ingredient in steel, and the energy to produce and ship the metal. U.S. prices for flat-rolled steel rose to $740 a ton in March from $665 a month earlier, according to Purchasing magazine. ``The key is going to be, does everybody else go along with this?'' said Charles Bradford, a metals and mining analyst at Soleil Securities in New York. ``You can bet that the auto guys are going to be yelling and screaming about it.'' U.S. steel prices are climbing even as demand stagnates because higher prices in other regions and a weak dollar are attracting the exports usually destined for North America. Hot- rolled coil, another key industry product, may now cost a record $1,000 a ton on the spot market, according to Robert Miller of Miller Mathis, a New York investment bank focused on steel.
Rio Coal, Copper Output Drops, Adds to Supply Concern Rio Tinto Group, the world's third- largest mining company, reported a drop in production of steelmaking coal, copper, diamonds, zinc and lead as the industry struggles to grow at a time of record-high prices. Miners are battling power shortages, bad weather, surging costs and digging out lower quality deposits as they attempt to exploit the global boom in demand for metals. Prices for coking coal and iron ore have surged to a record this year because of supply constraints and rising demand from steelmakers. Asian steelmakers agreed this month today to pay BHP and Mitsubishi Corp. $300 a ton for coking coal, up from $98 a year earlier.
Alcoa Profit Drops 54%, Falls Short of Estimates on Rising Commodity Costs -- Alcoa Inc., the world's third-largest aluminum company, said first-quarter profit tumbled 54 percent because of surging energy costs, a weaker U.S. dollar and lower metals prices. Alcoa is the first company in the Standard & Poor's 500 Index to report results for the first three months of the year. Earnings at S&P 500 companies probably fell an average of 11 percent from the same period a year earlier, according to analyst estimates compiled by Bloomberg. Chief Executive Officer Alain Belda is selling less- profitable units to boost earnings after the company fell behind United Co. Rusal and Rio Tinto Group in aluminum production in the past year. Alcoa also is seeking to sign long-term electricity contracts and increase the amount of cheaper hydropower it uses to cut costs.
Manufacturing
Caterpillar Profit Rises 13%, Beating Estimates, on Sales to China, India Caterpillar Inc., the world's largest maker of bulldozers and excavators, said first-quarter profit rose 13 percent, more than analysts predicted, as sales to China and India gained. Caterpillar rose in early trading. Net income climbed to $922 million, or $1.45 a share, from $816 million, or $1.23, a year earlier, the Peoria, Illinois- based company said in a statement today. Sales increased 18 percent to $11.8 billion. Caterpillar has been boosting operations in Asia, India and Eastern Europe, where construction and mining are driving machinery sales. That's buffering a slowdown in North America tied to the deepest U.S. housing slump in more than 17 years. Chief Executive Officer Jim Owens today said the U.S. is ``currently weathering a recessionary storm'' and that North American sales may be below the company's previous projection. Caterpillar first noted the possibility of a recession on Oct. 19 and cut its 2007 forecast. The stock fell 5.3 percent, adding to a 2.6 percent drop in the Standard & Poor's 500 Index. A Goldman Sachs Group Inc. report earlier this week predicted generally disappointing first-quarter results among U.S. companies, and warned of a ``swath of lowered profit guidance.'' North American machinery sales are now forecast to be down 2 percent to up 2 percent, below the company's previous projection for growth of as much as 5 percent this year. The U.S. housing slump contributed to an 11 percent decline in 2007, Caterpillar said last month. Caterpillar now predicts 2008 gross domestic product may rise 0.5 percent in North America, compared with global growth of 3 percent. The company previously projected 1.1 percent economic growth in North America and 3.1 percent worldwide.
Hefty cutbacks at Harley-Davidson A weak economy has Harley-Davidson (HOG) cutting back again. The Milwaukee-based motorcycle manufacturer said Thursday it will cut 730 jobs as it trims output to adjust for a downturn in demand. The company also slashed its 2008 earnings forecast, saying it expects to ship some 25,000 fewer bikes this year than it did last year. “With growing weakness in the economy, U.S. retail sales of Harley-Davidson motorcycles were down 12.8% in the first quarter,” said CEO Jim Ziemer. “Although these retail results are disappointing, Harley-Davidson’s U.S. dealers outperformed the heavyweight motorcycle industry, which was down 14%.”
GE Retreat From `In the Bag' 2008 Profit Growth Puts Immelt Under Pressure General Electric Co. Chief Executive Officer Jeffrey Immelt told shareholders in December that 10 percent growth in earnings to $2.42 a share this year was ``in the bag.'' What a difference four months make. GE reduced the forecast Immelt had repeated as recently as March 13, citing turmoil in financial markets that slashed the value of investments and thwarted end-of-quarter dealmaking. Fairfield, Connecticut-based GE three days ago predicted 2008 profit will increase no more than 5 percent, calling Immelt's forecasting and strategy into question with investors. ``Immelt now has to be put in the penalty box,'' James Hardesty, president of Hardesty Capital Management in Baltimore, said in an interview with Bloomberg Television. Hardesty Capital manages $700 million including GE shares. Immelt, 52, took over GE from Jack Welch just four days before the September 11, 2001 terror attacks and has spent his tenure fine-tuning GE to limit risks. He sold units with annual revenue of about $50 billion, such as plastics sensitive to oil prices, and protected GE's AAA credit rating while building higher-return areas such as power generation and commercial finance. Now he must rebuild faith with investors who had stuck with him during the 19 percent stock-price decline under his tenure because of GE's dividend yield of about 3.9 percent and consistent earnings.
Corporate Chameleon While radical corporate transformations are sometimes necessary, gutting a company and then rebuilding it is just as risky as it sounds. Former Thomson SA Chief Executive Frank Dangeard found that out the hard way. Over the past eight years, he engineered an audacious makeover at Thomson. He dumped the Paris-based company's unprofitable TV business, which made RCA- and Thomson-branded sets and picture tubes, and he bought dozens of small companies to create a €5.6 billion ($8.8 billion) provider of set-top boxes, DVDs and video-production services. He also cut more than two-thirds of the work force and reduced the size of the executive team. By last summer, more than 80% of the company's 23,000 employees had joined since 2001. Then the Canadian-born, Harvard-educated investment banker declared the hard work of assembly finished. Now, Mr. Dangeard's handiwork may be coming apart. Thomson's share price has been cut roughly in half in the past two months to €4.22, and its bonds have been downgraded to junk status. With financial results sagging, Mr. Dangeard stepped down last month as CEO, and this past Thursday he resigned as chairman. But Thomson's latest transformation was extremely unusual in its scope and speed, and it left the company disjointed, says David Collis, a Harvard Business School professor who wrote a case study on Thomson and advised management there for several years. Mr. Dangeard's vision "wasn't a bad one," says Robert Sanders, an analyst at Dresdner Kleinwort. "But unfortunately, there is little evidence that Thomson achieved any synergies from buying all these businesses and putting them together."