Slowdown looms as groups miss targets

Slowdown looms as groups miss targets
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2007
Published: February 11 2007 22:04 | Last updated: February 11 2007 22:04



The percentage of US companies failing to meet Wall Street’s earnings expectations has reached the highest level in more than two years, fuelling fears that corporate America’s record run of profit growth will come to an abrupt end.

Concerns of a slowdown in corporate profitability – one of the key reasons for the stock market’s record-breaking streak – have been heightened by companies’ increasingly bearish outlook on business prospects.

More than 22 per cent of the 400-plus S&P 500 companies to have reported results for the fourth quarter of 2006 failed to meet Wall Street expectations. This is the highest level of “misses” since the third quarter of 2004, according to Reuters Estimates.

The spike in earnings disappointments increases the chances that corporate America will end a three-and-a-half year run of quarterly double-digit profit growth in the last quarter of 2006 rather than at the beginning of 2007, as widely expected.

Missing earnings forecasts is particularly embarrassing for US companies because, unlike most of their European counterparts, many set their own yardsticks by providing analysts with quarterly earnings guidance.

“The period of rapid earning growth is at an end,” said Ashwani Kaul, senior research analyst at Reuters Estimates. “Companies have reached levels of high absolute earnings and cannot be expected to continue at this pace. We are entering a low earnings growth environment.”

The large number of companies missing Wall Street estimates – including carmaker Ford Motor, bond insurer MBIA and chip manufacturer Advanced Micro Devices – has prompted analysts to pare back forecasts. The consensus is that the S&P 500 will fall short of double-digit earnings growth in the fourth quarter of 2006. Slowing corporate profitability could compound the negative sentiment towards the US stock market, which last week had its biggest weekly fall since December amid fears over inflation, oil prices and rising mortgage defaults.

Analysts forecast a rise of about 5 per cent in earnings of S&P 500 companies in the first quarter of 2007, down from more than 7 per cent two months ago, according to Thomson Financial.

“We are going through a big transition in mindset,” said Mike Thompson, director of research at Thomson Financial. “We are finally seeing a slowdown in earnings.”

Top 10 US companies that missed estimates (Q4 2006)
Company Actual EPS ($) Consensus EPS ($) % difference
Pinnacle West Capital 0.10 0.25 -59.5
Rockwell Automation 0.76 0.89 -15.0
MBIA 1.31 1.47 -11.1
Cummins 3.55 3.83 -7.4
Phelps Dodge 3.94 4.22 -6.6
Freeport-McMoRan 1.99 2.12 -6.0
Ford Motor -1.10 -0.94 n.a.
Circuit City Stores -0.09 0.05 n.a.
Lennar -1.24 -1.11 n.a.
Advanced Micro Devices -0.04 0.08 n.a.