Wave Of Earnings Warnings Predicted
Published: 05 Mar 1998 15:40 GMT
Intel Corp.'s announcement Wednesday that first-quarter revenues would be off 10 per cent from its previous quarter is likely just the beginning of a wave of earnings warnings from leading technology firms.
At a time when the Dow Jones industrial average is trading at an all-time high, Intel's announcement comes just days after Applied Materials Inc. warned that sales throughout 1998 would be flat and Cabletron Systems Inc. (CS) said it would either break even or report a small loss this quarter because of intense pricing pressures.
A couple of significant factors are hampering technology firms' earnings as we approach the end of the first quarter. First, Asia is problematic. Currency rates continue to fluctuate while orders for everything from printed circuit boards to semiconductor equipment are far behind what was a languid pace in 1997.
Also, an oversupply of personal computers left over from the Christmas shopping season is wreaking havoc on new orders as well as profit margins. With Dell Computer Corp., Compaq Computer Corp. and IBM Corp. flooding the consumer market with lower priced PCs, retailers have cut prices to unload their excess inventory.
Then you add a less-than-optimistic tone from Fed Chairman Alan Greenspan to the mix and you have the makings for a technology stock meltdown. "There's going to be a huge correction throughout the sector and it will start tomorrow morning," said Louis Ehrenkrantz, an analyst at Ehrenkrantz King Nussbaum. "Intel will get blasted along with every other PC, semiconductor and equipment stock. Everyone has been far too generous with these valuations and now it's time to pay the piper."
The situation is eerily similar to that of the third quarter of 1997. Coming off a red-hot summer that included 60-percent and 100-percent growth, respectively, for Dell and Compaq, a batch of earnings warnings held technology stocks in check through the fourth quarter.
"It's the same thing, really, just another set of problems," said Megan Graham-Hackett, an analyst at S&P Equity Group. "Then, it was fourth-quarter sales and the possibility of an interest rates being raised. Now, it's Asia and perhaps some unrealistic expectations."
Some analysts said the recent rally that lifted the Dow more than 300 points in the past month is akin to a bear fattening up before hibernation. "Everyone knew this was all short-term and played it accordingly," Ehrenkrantz said. "You're going to see lots of big companies as well as some of the smaller ones coming out with bad quarters. It's inevitable."
Investors will not only will have to be more selective in their technology buys, but pay close attention to the particulars of each companies' quarterly results.
"Some guys are going to say Asia was the problem when in fact sales were off in North America or Europe or both," Ehrenkrantz said. "No one should accept this Asian excuse at face value."
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