Katrina Threatens Corporate Profits

Earnings are still expected to climb in the third and fourth quarters, but largely because the energy and construction sectors will be carrying the...
Craig SchneiderSeptember 1, 2005

Hurricane Katrina left a wake of destruction that is also expected to ripple through many sectors of Corporate America and cut into profits for the remainder of this year, according to Reuters.

Many analysts agree that the devastation to oil and gas production along the U.S. Gulf Coast will cause the price of crude oil and gasoline to climb; this morning Cable Headline News reported $6-a-gallon gasoline in some parts of Alabama. That rising cost has convinced Standard & Poor’s strategist Howard Silverblatt to forecast a drop in corporate earnings as consumers conserve cash and spend less freely, Reuters noted.

Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston, suggested that the negative earnings impact will likely felt by discount retailers, restaurants, and travel companies. Last month, before Hurricane Katrina tore through Louisiana and Mississippi, Wal-Mart Stores had already warned that its third quarter would be soft because steep oil prices had cut into consumer spending. Standard & Poor’s also predicted that higher prices for jet fuel could hasten bankruptcy filings by Delta Air Lines and FLYi Inc., the parent company of low-cost carrier Independence Air.

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The New York Times observed that exports as well as imports have been affected by Katrina. Damage to facilities in New Orleans and in Gulfport, Mississippi, have stalled incoming shipments of fresh produce as well as chemicals, steel additives, and, of course, oil. About 300 barges managed by agricultural producer and exporter Cargill, added the newspaper, sit on rivers north of New Orleans, many loaded with grain destined for Europe and Asia as the peak export season approaches.

Overall, according to Reuters Estimates, third-quarter earnings are forecast to rise 12.9 percent and fourth-quarter earnings, by 10.8 percent. UBS strategist Thomas Doerflinger, however, reportedly observed that “a major driver will continue to be high prices,” especially in the energy sector, which will offset declines in many other sectors.

The construction sector is expected to fare well, too. CIBC World Markets strategist Subodh Kumar believes reconstruction activity will likely boost earnings for cement and building-materials manufacturers, home improvement businesses, and companies that make equipment such as motors and pumps, reported the wire service.

Insurers face costs that range anywhere from $9 billion to $25 billion, according to BBC News; reinsurer Munich Re estimated $15 billion to $20 billion. The final cost will largely depend on the underwater damage to ports and seaways, said Peter Zeihan of economic consultancy Stratfor, according to the broadcaster.

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