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Brace Yourself Quarterly Earnings Aren't Half Bad


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BRACE YOURSELF--QUARTERLY EARNINGS AREN'T HALF BAD

If you're feeling malicious and want to cause a panic, just stand in the middle of Wall Street and shout: "Surprise!" For the past two years, that word usually has been preceded by the dread phrase "negative earnings"--Wallspeak for profits that aren't up to snuff. Depending on how far the actual profits come in below expectations, a stock can go into a tailspin.

Now, here's a real surprise: The first-quarter profits reported so far are decidedly upbeat. They're not barn-burners--in many cases, they are still below last year's first-quarter returns. Compared with expectations, however, the results are good across a broad swath of industries: banks, chemicals, forest products, publishing, railroads, and telecommunications.

When all the first-quarter profits are tallied, says Steven G. Einhorn, co-chairman of the investment-policy committee at Goldman Sachs & Co., they should show a 5% rise for the companies in Standard & Poor's 500-stock index. That may not sound like much, but he says it sets the stage for an acceleration of profits that should average out to about 15% growth for the year. That's good news for a stock market that has climbed 40% over the past 18 months on falling interest rates and hopes--just hopes, until now--for higher corporate profits. Now that rates have stopped falling, it's essential for earnings to start moving up if the market is to hold on to its gains, or even move higher.

Big, positive earnings surprises can be awfully bullish for the stocks of companies announcing the happy news. Look at Wells Fargo & Co.: On Apr. 21, the California banking giant unveiled first-quarter earnings of $2.09 a share, vs. $2.86 for 1991's first quarter. But the consensus forecast of analysts who follow the bank was just $1.22 a share.

CHEAP INK. Over the next two days, investors reacted to the bank's news by buying every share in sight, to lift the stock more than 20%, to 79 3/4. Thanks to lower interest rates and loan-loss charges, profit reports from Chase Manhattan, Chemical Banking, NationsBank, and even beleaguered Citicorp were better than expected, though less dramatic.

Companies that have delivered better-than-expected profits have had to do so largely by cutting costs to bring more revenues to the bottom line. "All the talk about lean and mean is starting to pay off," says Melissa R. Brown, director of quantitative research at Prudential Securities Inc. It had better: The economy was too weak to provide much top-line growth. And large multinationals have had to struggle, too, with economic slowdowns in Europe and Japan and a generally rising dollar, which eats into overseas profits.

The cost-cutting has even aided companies the market had all but given up on. IBM eked out a better-than-forecast 7% earnings gain on a slim 3% increase in revenues. Other companies boasting sharply improved margins included Hilton Hotels, Honeywell, and Panhandle Eastern. Newspaper publisher Knight-Ridder Inc. saved enough on lower interest costs and cheaper newsprint and ink to turn a $10 million revenue increase into a $9.1 million gain in profits. "That's extraordinary," says Stefan D. Abrams, investment strategist for Kidder, Peabody & Co. "The degree of operating leverage in these companies is going to surprise a lot of people."

HUMBLE PIE. The market hasn't gone all warm and fuzzy, though. Companies that spring the wrong kind of surprise still get no mercy. Shares of Storage Technology Corp. dropped 10 7/8, or 19.3%, on Apr. 21 after earnings of30 a share fell short of analysts' 48 forecast. Then, CEO Ryal Poppa jeopardized full-year estimates by disclosing that the company is behind schedule on its new disk drive--dubbed Iceberg--for mainframes.

Good news or bad, the spring reporting season should teach Wall Street analysts a lesson in humility. Only days before first-quarter reporting got under way, Benjamin Zacks of forecast compiler Zacks Investment Research feared Wall Street was in for another rout: Nearly all the analysts' revisions were downward. But to date, about 63% of the companies reporting first-quarter profits have met or exceeded forecasts. Zacks says about half the first-quarter reports he's expecting are already in, enough to declare that the positive surprises will keep on coming.

That's just the ticket for a market that was looking pricey relative to earnings. Few see the first quarter's profits as strong enough to send stocks much higher--much of the good news is already factored in. Indeed, throughout the first quarter, investors shifted out of noncyclical stocks such as Bristol-Myers Squibb, Gillette, and Philip Morris and into economically sensitive stocks such as Aluminum Co. of America, Cummins Engine, and Potlatch in anticipation of an economic recovery. But at least those who invested in the cyclical stocks now have a reason to hang on. Says Lawrence J. Marks of Harbor Capital Management: "In the first quarter, we planted the seeds for good earnings." Now, Wall Street will wait to see how that garden grows.WELLS FARGO

& CO.

-- Earnings per share: $2.09

-- Expected earnings: $1.22

-- Tight cost-controls offset continuing problems

in California real estate

-- Wells shares rose 9 7/8, to close at 76 1/8 on Apr. 21

STORAGE TECHNOLOGY

CORP.

-- Earnings per share: 30

-- Expected earnings: 48

-- Testing delays for company's new mainframe disk drive hurt profits

-- Shares fell 10 7/8, to close at 45 3/8 on Apr. 21

DATA: BRIDGE INFORMATION SYSTEMS INC., BW

A PREVIEW OF FIRST-QUARTER PROFITS

Margins

Sales % chg. Profits % chg.

$ mil. vs. 1991 $ mil. vs. 1991 1992 1991

ABBOTT LABORATORIES 1,877.9 +14 294.2 +16 15.7 15.4

ADVANCED MICRO DEVICES 407.4 +49 84.9 NM 20.8 1.5

ALCOA 2,251.4 7 76.0 22 3.4 4.0

AMERICAN CYANAMID 1,378.6 +5 114.8 +10 8.3 8.0

AMOCO 6,384.0 13 234.0 52 3.7 6.7

AMR 3,510.0 +27 20.0 NM 0.6 NM

ANHEUSER-BUSCH 2,621.1 +3 224.0 +11 8.5 7.9

APPLE COMPUTER r 1,716.0 +7 135.1 +3 7.9 8.2

AT&T 15,375.0 +1 883.0 +17 5.7 5.0

BELLSOUTH 3,738.7 +6 460.9 +39 12.3 9.4

BLOCKBUSTER ENTERTAINMENT 254.0 +44 25.7 +62 10.1 9.0

BRISTOL-MYERS SQUIBB 2,783.4 +2 547.5 +11 19.7 18.0

CAPITAL CITIES/ABC 1,095.4 13 41.7 29 3.8 4.7

CATERPILLAR 2,183.0 18 132.0 NM NM NM

CBS 1,082.0 +42 18.6 +79 1.7 1.4

CHAMPION INTERNATIONAL 1,200.3 +3 3.6 NM NM 1.3

COCA-COLA 2,771.9 +12 383.1 +19 13.8 12.9

COLGATE-PALMOLIVE 1,600.5 +9 113.8 +25 7.1 6.2

CORNING 804.6 +15 77.8 +65 9.7 6.8

DOW CHEMICAL 4,639.0 6 171.0 70 3.7 11.7

GENENTECH 117.1 1 3.5 82 3.0 16.4

GENERAL DYNAMICS 2,118.0 1 72.0 +44 3.4 2.3

GENERAL ELECTRIC 13,500.0 +3 1,058.0 +6 7.8 7.6

GEORGIA-PACIFIC 2,830.0 +2 5.0 NM 0.2 NM

GTE 4,823.0 +3 427.0 +117 8.9 4.2

HONEYWELL 1,481.6 +1 116.8 +63 7.9 4.9

IBM 14,037.0 +3 595.0 +7 4.2 4.1

INLAND STEEL 895.9 +8 27.4 NM NM NM

INTEL 1,241.3 +10 184.1 7 14.8 17.4

INTERNATIONAL PAPER 3,400.0 +10 104.0 19 3.1 4.1

ITT 5,085.0 +2 163.0 29 3.2 4.6

KNIGHT-RIDDER 555.4 +2 25.0 +58 4.5 2.9

LILLY (ELI) 1,557.1 +8 442.6 +14 28.4 27.1

LOCKHEED 2,226.0 0 66.0 +22 3.0 2.4

LOTUS DEVELOPMENT 227.1 +30 20.8 +216 9.1 3.8

MARRIOTT 1,953.0 +7 11.0 +10 0.6 0.5

MAYTAG 753.2 +2 28.5 +90 3.8 2.0

McGRAW-HILL 454.8 +6 14.2 +12 3.1 3.0

MERCK 2,223.4 +9 568.7 +18 25.6 23.6

MERRILL LYNCH 3,414.3 +9 277.5 +53 8.1 5.8

MICROSOFT rr 680.9 +40 178.8 +44 26.3 25.4

MINNESOTA MINING & MFG. 3,406.0 +1 288.0 4 8.5 8.9

MOBIL 15,151.0 9 127.0 82 0.8 4.3

MOTOROLA 3,055.0 +11 127.0 +9 4.2 4.2

NYNEX 3,237.9 4 336.2 +25 10.4 8.0

PACIFIC TELESIS 2,474.0 +3 331.0 +24 13.4 11.0

PAINEWEBBER GROUP 874.3 +19 74.3 +135 8.5 4.3

PFIZER 1,761.3 +4 295.1 +10 16.8 15.8

PHILIP MORRIS 11,854.0 1 1,099.0 +19 9.3 7.7

POLAROID 431.3 2 6.2 62 1.4 3.7

RAYTHEON 2,128.0 6 143.4 +7 6.7 5.9

REEBOK INTERNATIONAL 797.4 +15 62.3 +7 7.8 8.4

REYNOLDS METALS 1,284.2 6 13.3 52 1.0 2.0

SAFEWAY 3,395.9 0 22.9 14 0.7 0.8

SCHWAB (CHARLES) 265.0 +42 29.7 +180 11.2 5.7

SEARS, ROEBUCK 13,508.5 +5 321.8 +36 2.4 1.8

SOUTHWESTERN BELL 2,287.1 +7 261.6 +17 11.4 10.4

SPRINT 2,210.0 +2 99.9 +20 4.5 3.9

STORAGE TECHNOLOGY 333.7 8 12.5 7 3.7 3.7

TANDY rr 1,085.2 +7 35.1 4 3.2 3.6

TEXAS INSTRUMENTS 1,694.0 +3 40.0 NM 2.4 NM

TIME WARNER 3,007.0 +6 3.0 NM 0.1 NM

TRW 2,031.0 +6 41.0 +17 2.0 1.8

WELLS FARGO 1,422.0 7 119.0 22 8.4 10.0

WESTINGHOUSE ELECTRIC 2,826.0 +2 92.0 6 3.3 3.5

NM = not meaningful DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC.

r Second-quarter results rr Third-quarter results

Jeffrey M. Laderman in New York


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