Banking & Capital Markets

Limbo Lower Now

Corporates are revising earnings estimates at a record-breaking clip.
John GoffAugust 13, 2001

That loud thud you heard last week was the equity market hitting rock bottom. Despite a 117 point rally on the Dow on Friday, the DJIA is off more than three percent for the year. Just in case you’re scoring at home, Standard & Poor’s 500 index has fallen 10 percent since January 1, while the Nasdaq composite has lost a fifth of its market capitalization this year. Those are not the kinds of numbers that put a lilt in the step of corporate money-raisers.

Things aren’t likely to change anytime soon, either. According to a report by Thomson Financial/First Call, profits for US corporations will come in about 25 percent lower than initially forecast at the beginning of the year. The figure might get worse, too, since corporate managers continue to lower earnings estimates at a dizzying clip. Indeed, a new study by Credit Suisse shows that, from January to July, companies in the S&P 500 index lowered earnings or turnover estimates some 376 times. In all of 2000, there were only 390 downward revisions.

Moreover, downward earnings revisions are not necessarily a one-time event — at least not this year. The Credit Suisse survey noted that over 60 percent of the companies that have come out with earnings warnings in 2001 have come back with other warnings thereafter. Cisco Systems rates as the poster child for such behavior. Over the past 19 months, managers at the acquisitive network specialist have lowered earnings estimates ten times. Bedding gets changed less often.

Not that we’re picking on Cisco. Plenty of companies are having difficulty predicting this market. As we reported in our previous column, two initial public offerings were set to come to market the week of August 6. And in fact, Mykrolis Corp. and Omnicell did launch IPOs last week. But both offerings came in at the low end of their estimated price ranges, meaning the two companies ended up leaving money on the table. (As of Monday morning, shares of Mykrolis and Omnicell were trading above their offering prices.)

Executives at Beacon Education Management, the Westborough, Mass.- based education services provider, got their own primer on raising funds in a gloomy market. On Aug. 8, following two postponements, Beacon’s management withdrew the company’s planned IPO. The Beacon withdrawal was unusual, however, since the company is not a high-tech business. Of the six planned IPOs that were cancelled in July, five were for technology companies.

This week, only one company is expected to test the choppy waters of the IPO market. Managers at Max Re Capital, a Bermuda-based reinsurer, are looking to raise nearly $250 million with the company’s first ever public stock offering — $250 million, that is, if the offering comes in at the high end of the price range. These days, you wouldn’t want to bet a vital organ on getting the high end of an IPO price range.

That Seventies Show

From our One-Man’s-Ceiling department: For further proof of just how bad things are in the equity market, just wander into any government debt trading floor. The confetti and streamers should clue you in on how business is going. As one debt trader said in an interview last week, “We’re on a nice little roll right now.”

Nice little roll is one way of putting it. On Friday, yields on two-year Treasury notes dropped to 3.70 percent, the lowest rate since October 1992. If yields on two-year notes fall three more basis points, it would mark the lowest level since the securities were originally issued in the Seventies. Analysts at Goldman Sachs are now saying they expect the federal funds rate to fall to 3 percent by mid- 2002.

They may be spot on. As we reported last week, futures contracts traded on the Federal Reserve Board’s overnight bank lending rate indicate that investors expect another 25 basis point cut in rates on Aug. 21. Those investors also think it’s likely the Fed will lower rates at its next meeting in October.

Then again, if you think lower interest rates will eventually spark a corporate turnaround, consider this. On November 14, 1972 — back when credit facilities were cheap — the Dow Jones Industrial Average closed above 1000 for the first time. The next day, the Dow fell back below 1000. Despite continued low coupons on corporate loans, the Dow didn’t break through the 1000 mark again until 1982. On the bright side, nobody wore flare pants anymore.

4 Powerful Communication Strategies for Your Next Board Meeting