Bloomberg News

Worst Europe Earnings Hit Industrials as Stoxx 600 Falls 9%

August 01, 2011

(Closes today’s trading in sixth paragraph, adds U.S. earnings in seventh.)

Aug. 1 (Bloomberg) -- Profits at European companies are trailing analyst estimates by the most in at least five years, dragged down by manufacturing shares that had been forecast to lead a rally in the second half of the year.

About 53 percent of companies in the Stoxx Europe 600 Index that have reported earnings since July 11 missed analysts’ projections. That’s the most in data compiled by Bloomberg since 2006. The benchmark gauge lost 3.1 percent in the period, the largest decline to start an earnings season since April 2010.

Investors have been relying on manufacturers in Germany and Scandinavia to buoy stocks after Europe’s debt crisis forced Greece to accept a second bailout and cut projections for bank earnings. As commodities costs rise and currencies in Switzerland and the Nordic region strengthen, companies from Atlas Copco AB in Stockholm to Paris-based PSA Peugeot Citroen and Ludwigshafen, Germany-based BASF SE have disappointed, sending their shares down more than 5 percent.

“We were coming into an earnings season where expectations were quite high,” said Ben Ritchie, an investment manager at Aberdeen Asset Management in London, which oversees $290 billion. “When you look into financials, results have been weak but in line with estimates. Investors have been more optimistic about certain areas within the industrial space and where they have disappointed, shares have reacted strongly.”

Spreading Crisis

The Stoxx 600 fell 8.9 percent from its 2011 high on Feb. 17 through the end of last week as 10-year bond yields climbed as high as 6.29 percent in Italy and Spain on concern the region’s debt crisis is spreading from Greece, Portugal and Ireland. A struggle between U.S. lawmakers to lift the nation’s debt ceiling and avoid a default by the world’s largest economy also contributed to the decline.

The gauge plunged 1.2 percent to 262.02 at the 4:30 p.m. close in London today after a report showed U.S. manufacturing expanded in July at the slowest pace in two years.

A total of 88 companies out of 167 in the Stoxx 600 that reported earnings since July 11 trailed estimates, data compiled by Bloomberg show, while, in the U.S., 78 percent of Standard & Poor’s 500 Index members topped forecasts. Makers of industrial goods accounted for the biggest number of disappointments, with 18 of 33 companies lagging behind projections, the data show. Profits climbed an average of 7.4 percent from a year ago, trailing analyst forecasts by 11 percent, Bloomberg data show.

‘It’s a Concern’

“When the number of misses is that high, it’s a concern,” said Philipp Musil, who helps manage about $11 billion at Semper Constantia Privatbank AG in Vienna.

The 10 companies with the biggest misses in per-share profit dropped an average of 4.2 percent the day after releasing results, according to data compiled by Bloomberg. The 10 that exceeded estimates more than others declined 0.6 percent on average, data compiled by Bloomberg show.

More German companies have disappointed than any other country, Bloomberg data show. Investors were counting on Europe’s biggest economy to lead growth the next six months. Economies in Germany, Sweden and Norway may expand by an average of 3.5 percent in 2011, compared with a 1.4 percent rate in the U.K., France and Spain, according to the median forecasts of economists surveyed by Bloomberg.

“The good news is half-heartedly cheered and the bad news results in throat slitting,” said David Finch, head of cross- sector research at Exane BNP Paribas in Paris.

Options Traders

German options traders are paying the most to protect against declines in stocks since at least 2006. Prices for puts expiring in three months to sell the benchmark DAX Index rose to 1.6 times the level for calls to buy on July 29, close to the July 7 high of 1.71, according to Bloomberg data.

The day before the earnings season started, analysts were predicting 20 percent growth at industrial companies in 2011, almost double that for financial stocks. At the end of 2010, analysts had projected 19 percent expansion in industrial earnings this year and a 23 percent gain for financials.

They increased 2011 earnings estimates for seven of the 19 industries in the Stoxx 600 in the first half of the year, including industrial, automobile and chemical companies, and cut forecasts for banks.

Managers’ Survey

European fund managers had their biggest investments in manufacturers such as computer and software makers and industrial companies, according to a monthly survey by Bank of America Corp. on June 14. Banks, financial firms and utilities had the smallest weightings.

The results aren’t as bad as they seem given analysts’ high expectations and the “difficult” economy, said Henk Potts, who helps oversee $239 billion as an equity strategist at Barclays Wealth in London. Gross domestic product in the 17 countries that share the euro may slow to 1.7 percent next year from 2 percent in 2011, according to the median estimate of 22 economists in a Bloomberg survey.

Profits at companies in the Stoxx 600 are forecast to increase 22 percent in 2011, according to data compiled by Bloomberg. For 2012, analysts predict a 14 percent gain. About 40 percent of the index whose estimates are tracked by Bloomberg have yet to release results this period.

“Even if results haven’t absolutely blown analysts’ expectations out of the water, investors should still take some confidence,” Barclays’ Potts said. “Companies are still quickly feeding demand into the bottom line.”

High Expectations

Optimism for sales from outside Europe proved wrong, said Matthieu Giuliani, a fund manager at Palatine Asset Management in Paris.

“Investors remained with this idea that exporters were fine,” said Giuliani, whose firm oversees $5.8 billion. “Now at the least little slowdown, a stock can lose 7 or 8 percent. Expectations were too high.”

Atlas Copco dropped 8.1 percent, the most in more than two years, on July 18. The world’s largest maker of air compressors reported second-quarter net income of 2.98 billion kronor ($475 million), missing the 3.2 billion-krona average estimate in a Bloomberg survey of analysts.

Scania AB, the Sodertalje, Sweden-based truckmaker controlled by Volkswagen AG, posted second-quarter net income of 2.43 billion kronor on July 21, compared with the 2.73 billion- krona average forecast. The stock slid 4.5 percent.

Peugeot, Clariant

Peugeot tumbled 7.6 percent on July 27, the most in more than two years, as Europe’s second-biggest carmaker said its automotive unit may post a loss in the second half because of disruption from the Japanese earthquake in March and rising material costs. First-half operating profit rose 1.8 percent, held back by a 23 percent drop in earnings from carmaking.

The same day, Clariant AG sank 14 percent, the most in more than eight years. The Muttenz, Switzerland-based chemical maker said earnings before interest, taxes, depreciation and amortization declined 9.5 percent to 241 million francs ($306 million) because of the franc’s rally and a commodities jump.

The Standard & Poor’s GSCI Index of 24 commodities climbed to the highest since August 2008 in April. Copper in London ended the second quarter 45 percent higher than a year earlier while wheat futures in Chicago rose 28 percent.

BASF, the world’s biggest chemical company, fell 4.2 percent on July 28 after reporting second-quarter profit of 2.24 billion euros ($3.2 billion) that missed estimates and forecasting growth will slow in the second half.

The franc strengthened to a record against the U.S. currency on July 29, reaching 78.51 centimes per dollar, hurting the value of overseas sales for Swiss exporters. An exchange rate for the krona calculated by the Bank of England that values Sweden’s currency against a basket from trading partners rose to the highest since 1998 on March 1.

“Foreign exchange seems influential,” said Nigel Sedgley, an equity strategist at Collins Stewart Plc in London. “The concern I have is that some companies’ second quarter was weak but they are keeping guidance and that could be storing problems for the remainder of the year.”

--Editors: Andrew Rummer, Chris Nagi

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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