Earnings reports producing varied reactions on Wall Street

The Outlook

July 28, 1996|By Abbe Gluck

IT'S EARNINGS SEASON again, and Wall Street has noticed. Disappointing results from what have been the hottest companies in past quarters combined with reports from industries that exceeded analysts' expectations have produced mixed -- and volatile -- Wall Street reactions.

With about half the earnings reports released, how is the second quarter shaping up? Which sectors have done best, and why? And will the surprises continue into the next quarter?

Jeffrey Saut

Director of research,

Ferris Baker Watts Inc.,

Baltimore

For every bad report that comes out, I see between two and three that are better than expected.

It's because the economy has been stronger than people expected. If you go back and look at economic history, you will find that as long as consumers perceive it easy to get another job, which it is right now, they'll continue to spend money even though interest rates have gone up dramatically this year.

But you're getting companies, like U.S. Robotics, which beat the Street's estimates dramatically, and yet is down, because in their earnings release they cautioned the fourth quarter was unlikely to match the strong third one.

And you're getting a number of companies that are saying that. They are saying, "These are great numbers, better than we thought, but we aren't going to sustain it into the next two quarters."

They're saying these are peak earnings right now. Interest rates have risen, so the economy will slow down.

And it looks to me like for a lot of the momentum makers, the hot stocks for the past couple of quarters, the back of that momentum has been broken. Some of the momentum now is shifting to the drug stocks, like Bristol-Myers. I think they're more reliable in terms of predictability of earnings.

Ben Zacks

Executive vice president, Zacks Investment Research, Chicago

In aggregate, the earnings are coming in slightly ahead of expectations. Airlines earnings are way above estimates. The apparel manufacturers are above. So are financial services. We've had history-breaking flows of funds into mutual funds, and investment banking is also breaking records.

The reasons for all this volatility are, one, complete uncertainty as to the direction of the economy, going forward to where Alan Greenspan doesn't know, the Wall Street strategists don't know, no one knows.

That makes the question of what interest rates are going to do uncertain and it makes it difficult to know what sectors to invest in.

Another reason is the slowing of orders, fairly broadly based, in technology and capital spending, combined with the excessive valuations in the over-the-counter stock market.

They had been pushing these stocks to price/earnings ratios that were obscene, based on the belief that growth is just forever. And while we're at these phenomenal evaluations, you get one company after another saying orders are slowing. That all came together into a shakeout.

James Ferrare

Investment manager, Manchester Capital Corp., New York

I think the recent disappointing earnings announcements from companies such as Motorola have masked what has been a relatively good earnings quarter.

The plus side is there's an opportunity to buy companies such as Hewlett-Packard at prices significantly off from their high. In technology, you have an opportunity to reenter and buy high-quality companies that offer very attractive growth rates.

Going forward, one of the reasons other sectors have performed well is that they have been benefiting from relatively low interest rates. In the next few quarters, earnings disappointments may accelerate as interest rates have increased.

Look for companies with strong cash flow growth going forward. If you have a company that has cash flow and underappreciated asset value, you'll do well in a down market as well as an up market.

Richard Strauss

Asset managers and brokers analyst, Goldman, Sachs & Co., New York

For money mangers in general, it's going to be a good quarter. The market did fairly well in the June quarter and I think we're going to see very good numbers coming from the equity mutual fund companies.

We have yet to see T. Rowe [Price] but other money managers have met or exceeded expectations. For example, Charles Schwab was fantastic. That's because a lot of their business was pegged specifically to the growth of the mutual fund business.

The first part of the September quarter will be rougher, because in the next quarter, expenses are going to creep up and the value of equity assets will be affected by the correction we've seen in the stock market.

But technology stocks have been hit very hard. A lot of those stocks have been disappointing and mutual fund investors have been a little spooked by the volatility of the market.

Pub Date: 7/28/96

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