(FROM THE WALL STREET JOURNAL 10/26/15)
By Theo Francis and Kate Linebaugh
Quarterly profits and revenue at big American companies are
poised to decline for the first time since the recession, as some
industrial firms warn of a pullback in spending.
From railroads to manufacturers to energy producers, businesses
say they are facing a protracted slowdown in production, sales and
employment that will spill into next year. Some of them say they
are already experiencing a downturn.
"The industrial environment's in a recession. I don't care what
anybody says," Daniel Florness, chief financial officer of Fastenal
Co., told investors and analysts earlier this month. A third of the
top 100 customers for Fastenal's nuts, bolts and other factory and
construction supplies have cut their spending by more than 10% and
nearly a fifth by more than 25%, Mr. Florness said.
Caterpillar Inc. last week reduced its profit forecast, citing
weak demand for its heavy equipment, and 3M Co., whose products
range from kitchen sponges to adhesives used in automobiles, said
it would lay off 1,500 employees, or 1.7% of its total, as sales
growth sagged for a wide range of wares.
The weakness is overshadowing pockets of growth in sectors such
as aerospace and technology.
Industrial companies are being buffeted on multiple fronts. The
slump in energy prices has gutted demand for drilling equipment and
supplies. Economic expansion is slowing in China and major emerging
markets such as Brazil, which U.S. companies have relied on for
sales growth. And the dollar's strength also has eroded overseas
profits.
The drag on earnings and sluggish growth projections for next
year come as the Federal Reserve considers raising interest rates
for the first time in nine years, and could add momentum to those
in favor of postponing any rate increase to next year.
Profit and revenue are falling in tandem for the first time in
six years, with a third of S&P 500 companies reporting so far.
Analysts expect the index's companies to book a 2.8% decline in
per-share earnings from last year's third quarter, according to
Thomson Reuters.
Sales are on pace to fall 4% -- the third straight quarterly
decline. The last time sales and profits fell in the same quarter
was in the third period of 2009.
At some companies, foreign-currency effects hurt results
significantly. Consumer-products maker Kimberly-Clark Corp.
predicted that currency swings would slash earnings by 25% this
year, while Johnson & Johnson said that the dollar's moves
would reduce sales growth by almost 7 percentage points this year,
even without further fluctuations.
This week, another third of the S&P 500 are expected to
report their results, including such giants as Apple Inc., United
Parcel Service Inc. and Exxon Mobil Corp.
Much of the anticipated decline stems from the hard-hit energy
industry, where sales are expected to drop by more than a third
from a year earlier and profits are likely to plummet 65%, Thomson
Reuters predicts. Basic-materials companies face a 17% drop in
profits, and industrial sales are expected to decline more than
5%.
United Technologies Corp., which makes Otis elevators and
Carrier air conditioners, said it expects profits to be flat or
down in three of its four operating segments next year, despite
strength in its U.S. operations. Chief Financial Officer Akhil
Johri told investors last week that the Otis division's sales in
China fell 19% in the third quarter.
Other companies voiced similar concerns. "If you look at kind of
the broad industrial-production index, you see industrial
production sequentially coming down," said Fredrik Eliasson, chief
sales and marketing officer at railroad operator CSX Corp.
CSX is scaling back some operations in response to declining
coal shipments as power plants switch fuels, eliminating nearly 500
jobs in Corbin, Ky., and Erwin, Tenn. In the current quarter, the
company plans to reduce its average head count by 2% from the
third-quarter level.
U.S. manufacturing production rose in September at its slowest
pace in more than two years, the Institute for Supply Management
reported earlier this month. Economic activity at 11 industries
tracked by the group contracted during the month, while just seven
reported growth. Meantime, manufacturers told ISM that customer
inventories remained high, contributing to a slowdown in new
orders.
Some investors and analysts worry that companies accustomed to
boosting earnings by cutting costs, repurchasing shares and
refinancing debt will soon have to face the reality of worsening
sales. "The ability of corporations to take a 1% to 2% revenue line
[gain] and turn it into 5% to 6% profit growth is waning," said
Charlie Smith, chief investment officer of Fort Pitt Capital Group.
"They've run out of rabbits to pull out."
Still, cost-cutting continues. Companies from Twitter Inc. and
Biogen Inc. to Wal-Mart Stores Inc. and Monsanto Co. have announced
job cuts in recent weeks. That could boost the U.S. unemployment
rate, which ended September at 5.1%, its lowest point since April
2008.
"Things are definitely a bit shakier than they were several
months ago," said Joseph LaVorgna, chief U.S. economist at Deutsche
Bank. But, he added, "the U.S. is fundamentally in decent
shape."
Indeed, low fuel prices have boosted U.S. car sales and buoyed
airlines' results, and the U.S. construction market remains robust.
And, even among manufacturers, the aerospace industry is doing
well. Technology giants Amazon.com Inc. and Microsoft Corp. posted
strong results on Thursday, as did Google parent Alphabet Inc.
Such strength suggests that the broader economy is unlikely to
succumb to the industrial sector's gloom, especially given robust
profit margins, said Jeremy Zirin, chief U.S. equity strategist for
wealth management at UBS. "The broad mosaic of data suggests that
the U.S. economy is still doing OK," Mr. Zirin said. "This isn't a
very bullish view, it's just saying things aren't as bad as
feared."
Others worry that the slowdown is spreading to consumer
businesses. Wal-Mart recently warned its sales this year are likely
to be flat, down from projection of as much as 2% growth, and cut
its earnings forecast for next year as it raises wages.
And truckload carriers have warned that they aren't witnessing
the usual uptick in retailer demand as the holiday season
approaches, thanks to stubbornly high inventories, said Alex
Vecchio, a transportation analyst at Morgan Stanley.
"Transportation companies are typically a leading indicator, and
our data is not good," Mr. Vecchio said.
(END) Dow Jones Newswires
October 25, 2015 20:07 ET (00:07 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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