U.S. Profit Growth Stalls

S&P 500 earnings seen gaining just 0.6% in first and second quarters as European slump hits U.S. recovery.

U.S. corporate profit growth stalled in the U.S. last quarter as companies from McDonald’s Corp. to 3M Co. saw gains in the world’s largest economy eroded by a slump in Europe.

Earnings at Standard & Poor’s 500 Index companies, excluding financials, are seen gaining 0.6 percent in the first and the second quarter from a year earlier, according to analysts’ estimates compiled by Bloomberg, the slowest growth rate since 2009.

The European debt crisis and a slowdown in China are hurting S&P 500 companies, which derive about 40 percent of profits from abroad. At home, where the S&P 500 Index had its biggest first-quarter rally since 1998, consumer confidence is improving along with the job market -- boosting demand for construction companies and retailers.

“While the U.S. economy is the cleanest shirt in the hamper at the moment, we’re only talking about an economy that’s motoring along at a subpar pace,” said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion. “The only way you’re going to see higher profitability is through faster growth.”

The U.S. economy will accelerate 2.2 percent this year, up from 1.7 percent in 2011, according to the average of 72 estimates compiled by Bloomberg.

Federal Reserve Chairman Ben S. Bernanke said yesterday the economy hasn’t fully recovered.

“About three and a half years have passed since the darkest days of the financial crisis, but our economy is still far from having fully recovered from its effects,” Bernanke said in a speech in Stone Mountain, Georgia.

Last month, China pared its growth target to 7.5 percent from an 8 percent set in 2005. The 17-nation euro economy is projected to contract 0.4 percent in 2012, with recessions in countries including Greece and Spain.

“If you do business in Europe, that’s going to be hurting,” Jim Paulsen, who helps oversee about $333 billion as chief investment strategist at Wells Capital Management in Minneapolis, said in a phone interview last week. “You certainly are seeing some slowing trends in the emerging world.”

 

Earnings Outlook

Alcoa Inc., the biggest U.S. aluminum producer, will be the first company in the Dow Jones Industrial Average to announce results when it reports today. The New York-based company is projected to post a loss of 4 cents a share, according to the average of 19 analysts’ estimates, compared with profit of 28 cents a year earlier, hurt by an average 12 percent aluminum- price decline in the quarter.

Earnings growth will speed up in the second half for S&P 500 companies, with a projected gain of 6.9 percent for 2012, driven by an accelerating recovery in the U.S. and improving emerging markets.

“Some of the emerging market economies that have been weak, like China for example, should start to rebound,” Barry Knapp, head of equity strategy at Barclays Capital Inc. in New York, said in an interview last week. “The numbers could be a little better in the second half.”

Europe is crimping General Electric Co.’s health-care sales and demand for 3M’s consumer products. GE, the world’s largest maker of medical imaging equipment, may see sales drop 10 percent at its health-care unit in Europe as governments cut spending as part of austerity measures.

“Health care is going to be pretty challenging,” Jeff Sprague, co-founder of Vertical Research Partners in New York, said in a telephone interview. “That’s where the impact is going to be most visible and in other businesses it’s going to be felt more around the margins.”

GE, based in Fairfield, Connecticut, is projected to report earnings of $3.43 billion, according to analysts, down 2.3 percent from a year earlier.

3M Chief Financial Officer David Meline said in January that the St Paul, Minnesota-based company anticipated from China “continued below-trend growth in the first half of 2012 with stronger growth returning in the second half.” Net income at 3M, which gets more than 20 percent of its sales from Europe and about 31 percent from Asia Pacific, will fall 5.2 percent to $1.05 billion, according to analysts’ estimates.

 

European Slump

Declining demand in Europe is prompting Dow Chemical Co., the largest U.S. chemical maker, to shut five factories and cut 900 jobs. Analysts project the Midland, Michigan-based company to post earnings of 58 cents a share, down from 82 cents a year earlier.

McDonald’s, the world’s largest restaurant chain, posted same-store sales for February that trailed analysts’ estimates after consumers cut spending in Europe. First-quarter net income at the Oak Brook, Illinois-based company may have increased 5 percent to $1.27 billion, according to analysts’ estimates, less than half the growth of the fourth quarter.

Analysts’ estimates for S&P 500 earnings growth have declined to 0.6 percent from 4.4 percent in the first week of January, according to data compiled by Bloomberg.

“Expectations have been coming down,” said Todd Lowenstein, a fund manager with Highmark Capital Management in Los Angeles, which oversees about $17 billion. “Companies have managed them down pretty well. This could set the table for some good beats for the quarter.”

Parker Hannifin Corp., a Cleveland-based manufacturer of fluid power systems, in January cut its full-year forecast as international demand slowed. Analysts predict earnings for the quarter that ended in March to drop 4.7 percent to $268 million, the average of eight estimates compiled by Bloomberg.

Apple Inc., the world’s most valuable company, will help boost S&P 500 earnings growth with an estimated 53 percent jump in quarterly profit to $9.2 billion. Since 2008, sales at the Cupertino, California-based company have quadrupled, driven by demand for the iPhone and iPad.

Other technology companies are posting unchanged sales and sagging profits as corporate purchases of equipment to boost productivity fail to make up for lower consumer sales.

Intel Corp., the world’s largest chipmaker, may report that first-quarter sales were little changed from a year earlier at about $12.8 billion, according to the average of analysts’ estimates. Demand for its processors is beginning to recover from a slump in orders for computer parts caused by production shortages of hard disk drives, according to Suji De Silva, an analyst at ThinkEquity LLC.

 

Microsoft Buybacks

Share repurchases will help Microsoft Corp.’s earnings per share to increase to 57 cents from 56 cents, according to analysts’ estimates. Net income will drop 6.9 percent to $4.87 billion. The world’s largest software company, based in Redmond, Washington, began a $40 billion, five-year share repurchase plan in 2008.

The yen pared losses today after Japan kept its key overnight rate unchanged, while gold and bond risk rose on Bernanke’s comment about the U.S. economy not having fully recovered.

The MSCI Asia Pacific Index was little changed, while Standard & Poor’s 500 Index futures gained 0.3 percent after the gauge fell 1.1 percent yesterday. The cost of insuring Australian and Japanese corporate bonds from non-payment rose to the highest since Jan. 30.

The Bank of Japan left its key interest rate and stimulus programs unchanged, it said today.

Sony Corp., Japan’s biggest exporter of consumer electronics, may have net income of 63.4 billion yen ($779 million) for the fiscal year started April 1, based on the average of 18 analysts’ estimates compiled by Bloomberg. That outlook compares with the average of 17 analyst estimates compiled by Bloomberg for a net loss of about 218 billion yen in the year ended March 31.

Kazuo Hirai, who replaced Howard Stringer as president and CEO, is set to unveil details of his management strategy April 12 after the strong yen, falling television prices and lack of hit products led the company into four consecutive years of losses.

Toyota Motor Corp.’s earnings per share may more than quadruple to 39 yen for the three months ended March 31, from about 8 yen a year earlier, according to the average of three analysts’ estimates compiled by Bloomberg.

The automaker is working to increase U.S. sales 15 percent this year, which would bring it to about 1.89 million vehicles, or about 600,000 fewer than General Motors Co. sold last year in its home market.

 

Auto Industry

German automakers Daimler AG and Volkswagen AG in 2012 may match last year’s record operating profit as increasing sales in the U.S. and China offset a market slump in Europe, where industrywide deliveries are expected to drop for a fifth straight year.

Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, forecast last month that pretax profit this year will beat 2011’s result on demand for the next-generation 3- Series sedan.

Daimler, the world’s third-largest maker of luxury cars, boosted Mercedes-Benz brand sales in the first quarter 12 percent to 313,902.

GM will probably report first-quarter earnings, excluding some items, fell to 83 cents a share from 95 cents a year earlier as the automaker struggled with losses in Europe and saw U.S. market share decline.

The U.S. economy is powering profits of companies such as Caterpillar Inc., the world’s largest maker of construction and mining equipment, as North American customers replace aging fleets after delaying purchases during the recession. Caterpillar, based in Peoria, Illinois, is expected to report earnings per share of $2.12 in the first quarter, a gain of 15 percent from a year earlier.

“The industrial recovery continues despite macro worries,” Stephen Volkmann, a New York-based analyst for Jefferies & Co. who has a buy rating on the shares, said in a report March 20.

Banks may see about 10 percent less revenue from trading than in the first quarter of 2011, according to Keith Horowitz, an analyst at Citigroup Inc. Low interest rates may also continue to put pressure on lenders’ net interest margins, the difference between what banks pay on deposits and charge for loans, KBW Inc. analysts led by David Konrad said in a note.

 

O

utsized Profit Gains

JPMorgan Chase & Co., the largest U.S. bank by assets, is estimated to report earnings of $4.53 billion, an 18 percent drop from the $5.56 billion it posted a year earlier. Citigroup will probably report a 1 percent increase in its earnings, while Bank of America Corp.’s are estimated to be unchanged.

Banks will also see loan growth for the first time in three years, according to Chris Kotowski, an analyst at Oppenheimer & Co.

The S&P 500 Index posted a 12 percent gain in the first three months of the year to 1,408.47, the biggest first-quarter increase since 1998. Stocks rallied following Greece’s bailout and on optimism about the U.S. recovery, Wells Capital’s Paulsen said.

“We’re already at record earnings and didn’t get paid for them,” Paulsen said of the profit gains in the last two years. “We don’t really need a lot of earnings from here. We just need them not to fall apart.”

Investors shouldn’t get too excited about 2 percent growth in the U.S., said Savita Subramanian, chief equity strategist with Bank of America in New York. That kind of growth won’t support the outsized profit gains that analysts had grown accustomed to as companies rebounded from recession, she said.

“We’re getting to a normal economy where earnings growth is getting a little more to the 6 to 7 percent range,” said Subramanian, who estimates that about 40 percent of S&P 500 Index profits come from overseas. “Analyst expectations are still a little too high.”


 

Bloomberg News

 

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