By Theo Francis and Kate Linebaugh
America's biggest companies logged a fourth straight quarter of
shrinking profits and tepid sales, as weakness from energy
companies and lower business investment more than offset U.S.
consumer strength.
Earnings reports for the second quarter showed improvement from
the first three months, but concerns about the country's economic
prospects are casting a shadow over the outlook for the remainder
of the year. Executives said they are worried about slowing
industrial production and a tumultuous political climate.
Construction machinery giant Caterpillar Inc. last week cut its
annual profit forecast, warned of layoffs and said it doesn't
expect sluggish global growth to reverse this year. Praxair Inc.,
which makes industrial gases, said it would have to cut costs at
one of its business lines as a result of a manufacturing slowdown
in the U.S.
"Industrial production is lackluster," said Michael Kneeland,
chief executive of United Rentals Inc., which rents equipment to
construction and industrial firms. The company has moderated
capital spending as reduced demand from the oil industry left a
glut of equipment available in the market.
With just over two-thirds of S&P 500 companies reporting
results, adjusted earnings -- which exclude various items deemed
unusual -- are expected to fall for the fourth straight quarter,
down 2.6% from the same period last year, according to Thomson
Reuters. Revenues are also forecast to slip 0.4%, the sixth
straight quarterly decline.
The pain is broad-based: Only the consumer-discretionary,
health-care and utilities sectors are expected to see profits grow
by more than 5%. Quarterly earnings are forecast to decline by 87%
for energy companies, 3.6% for financial firms and 1.4% for
telecommunications companies, according to Thomson Reuters.
Energy companies have been suffering for more than a year, with
oil prices collapsing from around $115 a barrel in mid-2014 to a
low of $27 in January. But profit declines are slowing as prices
have somewhat rebounded to around $40 a barrel, and many analysts
expect results to keep improving in the third and fourth
quarters.
Excluding the hard-hit energy sector, second-quarter earnings
are expected to rise by a still-slow 1.8%, while revenues are
likely to increase about 2.6%, Thomson Reuters said.
Analysts polled by Thomson Reuters now forecast that the third
quarter will barely show profit growth, predicting an average
increase of 0.3% for companies in the S&P 500 compared with
expectations of 2% growth a month ago. Earnings forecasts often
become less optimistic as a quarter progresses.
The U.S. stock market has remained largely resilient as
investors have favored equities in the face of low yields from
other investments. However, following seven record closing highs
posted in July by the S&P 500 and the Dow Jones Industrial
Average, the market is showing some signs of jitters. The Dow fell
for a seventh straight day on Tuesday.
The muted manufacturing and industrial picture was countered by
some encouraging results from consumer-oriented companies and
high-profile tech firms like Facebook Inc. and Google parent
Alphabet Inc. that have seized on mobile advertising. Online
retailing giant Amazon.com Inc. clocked its third straight profit
record, helped by stronger product and cloud-computing revenue.
Outdoor-equipment retailer Cabela's Inc. reported its first
increase in same-store sales since third-quarter 2013, though
margins suffered from heavier discounting. Fortune Brands Home
& Security Inc., which sells cabinets, plumbing fixtures and
door locks, noted higher new-home construction and said that
remodeling activity continued to reflect strong pent-up demand from
consumers.
"We hear through all of our builder relationships that
everybody's busy, " CEO Christopher Klein said.
Overall, consumer spending rose by 4.2% in the second quarter,
the U.S. Commerce Department reported, marking the strongest growth
since late 2014 and offsetting continued declines in business
investment. Meanwhile, average hourly earnings are starting to
increase.
But some consumer-driven companies are warning of trouble. "We
continue to face a relatively slow-growth, volatile world," Jon
Moeller, chief financial officer of Procter & Gamble Co., which
sells Gillette razors and Pampers diapers, told investors
Tuesday.
The U.S. economy got its weakest annual start since 2011,
tracking a 1% growth rate for the first half of 2016, the Commerce
Department reported Friday. Gross domestic product increased just
1.2% in the second quarter.
"You're still looking at a sluggish economy," said Joseph
LaVorgna, Deutsche Bank's chief U.S. economist.
And recent events from terrorist attacks and police shootings to
the heated political rhetoric around the U.S. presidential election
has given pause to some companies.
Starbucks Corp. CEO Howard Schultz said the U.S. restaurant
industry experienced a "profound weakening in consumer confidence"
in the latest quarter, cutting into customer traffic and ending the
coffee chain's 25-quarter string of at least 5% sales growth
excluding newly opened and closed stores.
"We have a situation where you have a very uncertain election,
you have domestic civil unrest with regard to race, and I think the
issues around terror have created a level of anxiety," said Mr.
Schultz. "So we are no longer looking at just an economic
downturn."
McDonald's Corp. CEO Stephen Easterbrook attributed softer
consumer demand in part to general economic uncertainty, along with
factors like a widening gap between the cost of restaurant meals
and groceries. In the U.S., the company's comparable sales rose by
1.8%, well below the 3.2% growth expected by analysts.
"Whether through elections or through global events, people are
slightly mindful of an unsettled world," Mr. Easterbrook told
investors last week. "When families are uncertain, caution starts
to prevail, and they start to hold back."
Write to Theo Francis at theo.francis@wsj.com and Kate Linebaugh
at kate.linebaugh@wsj.com
(END) Dow Jones Newswires
August 03, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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