Earnings Growth

This has been the summer of raging uncertainty in corporate America. The second-quarter earnings season, which began two weeks ago, has seen positive and negative extremes. But the earnings reports and the company comments that accompanied them have given Wall Street little direction on where the economy and the stock market are heading. "My crystal ball is still fuzzy," said Charles L. Hill, director of research at Thomson First Call. "I thought we would get more clarification on the outlook for the third and fourth quarters, but for every positive we get a negative."

In a big turnabout from the 1990s bull market, dividend-paying stocks are in vogue. This is not just because a big tax cut on dividends is in the works, although that certainly helps. The bear market brought the virtues of dividends into focus. In the wake of a number of accounting scandals, investors have grown increasingly weary of reported earnings figures. But while earnings can be easily manipulated, dividends can't be fudged, and it takes real cash to pay them. The income dividends provide is a welcome cushion when earnings and stock prices are falling.

Low expectations lie at the heart of successful investing. The simplest way to understand this is to think about the drivers of stock returns: dividends, earnings growth and earnings multiples. Let's assume you're looking at DoughNutz, a growth stock plowing all its excess profits back into the business - which means it's not paying a dividend. In this case there are two - and only two - factors driving the movement of DoughNutz's stock price: earnings growth and earnings multiples. Let's say the company's earnings per share are growing at 15 percent per year, and you pay 15 times earnings for the stock.

W. R. Grace & Co. issued its second earnings warning in as many months yesterday, saying a weak euro and rising prices for natural gas and raw materials will hurt profits more than was previously thought. The Columbia chemical maker also said that asbestos-related litigation could prompt it to take a charge in the fourth quarter. Last month, Grace officials warned that its target of 12 percent to 15 percent earnings growth last year wasn't likely to be reached. Instead, it said, it expected earnings growth of 10 percent to 12 percent.

W. R. Grace & Co.'s chief executive said yesterday that, thanks to high oil and natural gas prices and a strong dollar, earnings growth at the Columbia chemical maker this year and next will likely be less than it had expected. That news, coupled with Standard and Poor's announcement Monday evening that the company would be removed from the S&P 500 as of Friday, drove shares down 63 cents, or 28 percent, to $1.63, a 52-week low and their first close under $2. Bethlehem Steel Corp. will also be removed from the index.

Driven largely by improvements in its Davison Chemicals segment, W. R. Grace & Co. reported second-quarter earnings yesterday that beat analysts' estimates by 2 cents a share. For the three months that ended June 30, the chemical maker had net income of $34.6 million, up 35 percent over the $25.7 million reported for the like quarter of 1999. Last year's second quarter, however, included a $4.7 million after-tax loss from discontinued operations. Diluted earnings per share were 50 cents; analysts, on average, had expected 48 cents.

Marriott International Inc., one of the world's largest hotel operators, said yesterday that its earnings rose 10.5 percent in the second quarter as the booming economy spurred consumers to spend more on travel. Bethesda-based Marriott reported earnings of $126 million, or 50 cents a share, up from $114 million, or 42 cents a share, a year earlier. In the quarter ending June 16, Marriott's sales in lodging, distribution and senior living services rose 17 percent, to $2.39 billion from $2.04 billion.

McCormick & Co. Inc. reported lower-than-expected earnings yesterday for its fourth quarter that ended Nov. 30, though President and Chief Executive Officer Robert J. Lawless vowed that the Sparks-based spice-and-seasonings company would notch earnings growth in the low double digits in 1999.McCormick shares closed yesterday at $30.6875, down $1.5625, after the company said it earned 68 cents per share in the quarter. That was a slight improvement over the 65 cents the firm reported for the corresponding period the year before, but fell short of Wall Street's consensus estimate of 73 cents, according to Zacks Investment Research.

NEW YORK -- The Standard & Poor's 500 and Nasdaq composite indexes set records yesterday, led by computer-related shares, after analysts predicted that Microsoft Corp. and MCI WorldCom Inc. will soar in 1999 as the companies' earnings growth rates beat the average of other S&P 500 members.The S&P climbed 16.68, or 1.4 percent, to 1,244.78, and the Nasdaq jumped 43.22, or 2.0 percent, to 2,251.27.The Dow Jones industrial average rose 126.92, or 1.4 percent, to 9,311.19, after coming within 45 points of its Nov. 23 high.