BW Online | March 14, 2001 | Earnings Flu for Europe, Too?

BW MAGAZINE Get Four Free Issues Register Subscribe Customer Service

ONLINE FEATURES Book Reviews BW Video Columnists Interactive Gallery Newsletters Past Covers Philanthropy Podcasts Special Reports BLOGS Auto Beat Bangalore Tigers Blogspotting Brand New Day Byte of the Apple Economics Unbound Eye on Asia Fine On Media Green Biz Hot Property Investing Insights Management IQ NEXT: Innovation NussbaumOnDesign Tech Beat Working Parents TECHNOLOGY J.D. Power Ratings Product Reviews Tech Stats Wildstrom: Tech Maven AUTOS Home Page Auto Reviews Classic Cars Car Care & Safety Hybrids INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads

BW EXTRAS BW Digital BW Mobile BW Online Alerts Dashboard Widgets Podcasts RSS

RSS Feeds

Reprints/ Permissions Conferences Research Services

MARCH 14, 2001

INVESTING Q&A

Earnings Flu for Europe, Too?
Even as analysts sharply downgrade forecasts on the Continent, HSBC Securities' Jason James says the pain will be even worse

STORY TOOLS

Search for business contacts:

PREMIUM SEARCH
Search by job title, geography and build a list of executive contacts

With profit warnings flying thick and fast from U.S. companies, are European corporate earnings about to hit the skids, too? It sure looked that way on Mar. 12, when Swedish telecommunications-equipment maker Ericsson projected a first-quarter loss of up to $500 million, fueling a sharp plunge in the Nasdaq and in European technology markets. Mar. 13 saw more nervousness when Germany's Siemens cut its earnings targets because of weakened demand for semiconductors produced by its Infineon unit.

Overall, most analysts now expect European corporate earnings to grow less than 10% in 2001, down from nearly 20% last year. How bad could it get, and who could suffer most? BusinessWeek Correspondent Carol Matlack talked to Jason James, European equity strategist at HSBC Securities in London, who's decidedly bearish on the market's prospects. Here are edited excerpts from their conversation:

Q: What are your projections for European corporate earnings this year?
A: We are looking for only 2% growth. That's well below the consensus, which is now 8% to 10%. But the consensus still assumes that EBIT [earnings before interest and taxes] margins will improve from 11.9% to 12.2% this year. We think this is unrealistic when sales are slowing.

Q: What concrete signs of distress do you see?
A: The slowdown only became apparent in the fourth quarter of last year. For example, we've seen very weak results from [French tire maker] Michelin and [French steelmaker] Usinor. But there's no huge evidence of weakness in results. A bigger impact than the results themselves has been the outlook. Companies are warning of tough times ahead, mainly in the technology sector. Nokia has downgraded expectations for world [mobile-telephone] handset sales. Alcatel is predicting a slowdown, too.

Q: What are the factors depressing earnings?
A: It's partly the slowdown in the U.S. European companies have a little over 20% of their sales in the Americas, the bulk of that in the U.S. But there's quite a slowdown in Europe, too. We expect only 2.5% GDP growth in Europe this year [down from 3.3% in 2000]. Of course, this is still better than the U.S. We believe the U.S. is already in recession. Also, we are forecasting the euro to continue strengthening against the dollar, to 1.05 [dollars per euro] by the end of the year. If that's right, it will depress earnings for European companies.

Q: Are any countries especially vulnerable?
A: Germany stands out. About 25% of the market there is cyclical industrials, and they tend to be export-oriented. You've already seen problems at DaimlerChrysler. Also, I'd look at the big chemical companies. The German banks have made a big push into investment banking, and now that's turning down quite sharply, with mergers and acquisitions down 60% year-on-year. A lot of German banks increased staff last year, and now are faced with rising costs.

Q: Besides technology, what sectors do you expect to weaken?
A: There's the oil sector. Oil was a big contributor to earnings growth last year. This year, we think the price will average $25 [a barrel, down from a peak of $37 last year]. The companies are having to invest more in exploration, and the oil majors have already done a lot of cost-cutting, so there's not much left to cut.

Also, there's the telecommunications sector. As the impact of those [third-generation mobile-telephone] licenses kicks in, the balance sheets are under pressure. Credit ratings have been cut, and acquisitions have depressed earnings. I expect to see both Vodafone and Deutsche Telekom in loss at the net level as a result of goodwill amortization [from acquisitions]. And we're starting to see weakness in cyclicals. There's a lot of pressure on some product prices.

Edited by Douglas Harbrecht