By Theo Francis and Kate Linebaugh
This is the corporate landscape that will greet the next
president: improving profits buoyed by rising employment and
business spending -- yet tempered by the elusiveness of a more
resilient recovery.
Earnings for the biggest U.S. companies began to rebound in the
third quarter, a glimmer of growth after four straight quarters of
contractions. But some executives are already expressing caution
about the coming year.
Delphi Automotive PLC, the big car-parts maker, forecast flat
auto sales in the new year, though it expects its own business to
fare better. Whole Foods Markets Inc. projected negative to flat
sales at grocery stores open at least a year, warning that
food-pricing trends could worsen before they improve. Drugmaker
AmerisourceBergen Corp. said its fiscal 2017 growth would lag
behind that of recent years, in part due to pressure on
generic-drug prices and uncertain prospects for brand-name price
increases.
"The outlook for GDP, corporate profits and corporate investment
is more favorable in 2017," said W. Edward Walter, chief executive
of Host Hotels & Resorts Inc. "But the concept that it will be
better next year has been offered frequently during this recovery
and generally hasn't come to fruition."
With 85% of S&P 500 companies reporting results for the
quarter, adjusted earnings -- excluding write-downs, restructurings
and other items considered unusual -- are expected to rise 3.9%
from last year's third quarter, according to Thomson Reuters.
Revenues are expected to increase 2.6%.
Excluding the beleaguered energy sector, earnings are expected
to rise 7.5%, with revenues up 4.5%, Thomson Reuters said. The
figures reflect actual results for companies that have reported and
analyst expectations for others.
Third-quarter improvements were led by technology, basic
materials, financial and consumer discretionary companies, as well
as utilities. Real estate, health care and financials showed the
most improvement in revenues. The worst-performing sector remained
energy, where profits are down 67% from third-quarter 2015 and
revenue declined 15%.
"It's hard to paint this as anything but a good earnings
season," said Jonathan Golub, chief U.S. equities strategist for
RBC Capital Markets. "For this recovery, this has been pretty
healthy compared to the environment we've been in for several
years."
He said many 2017 estimates for earnings growth are probably too
optimistic, but that doesn't mean pessimism is warranted.
Coffee chain Starbucks Corp. said strength in China helped
overcome softer U.S. sales to send profits up 23% in the quarter.
Health insurer Humana Inc. said gains in its Medicare and services
businesses overcame weakness in Affordable Care Act operations.
Strong trading activity boosted the latest results of the biggest
U.S. banks, including Bank of America Corp. and J.P. Morgan Chase
& Co.
The U.S. economy is clearly on the mend now, seven years after
the recession. Last week, the Commerce Department said gross
domestic product expanded at 2.9% in the third quarter, the
strongest showing in two years. Spending on durable goods in the
quarter remained strong and business spending rose for the second
quarter in a row.
On Friday, the Labor Department said average hourly earnings
rose 2.8% year-to-year in October, the fastest increase since 2009,
with businesses adding jobs at a healthy clip. Consumer spending is
projected to rise 3.6% this holiday season, according to the
National Retail Federation, despite uncertainty caused by the
presidential election.
Still, many executives fret that the better results may not
carry over into 2017.
American Express Co. finance chief Jeffrey Campbell said
big-company spending remains weak, with billings declining from a
year ago, as companies cut costs in the face of slow revenue
growth. Procter & Gamble Co. posted 3% organic sales growth in
the latest quarter, but its finance chief Jon Moeller cautioned
that it wasn't enough to boost the company's forecast for just a 2%
increase in organic sales for the year that will end in June.
"We continue to face a relatively slow-growth, volatile world,"
Mr. Moeller said. "Progress will not come in a straight line."
Kimberly-Clark Corp. Chief Executive Thomas Falk echoed that
sentiment, after the maker of Kleenex tissues and Huggies diapers
lowered its financial forecasts for the rest of the year, in the
face of currency fluctuations and slower sales in emerging
economies.
"Every economic forecast, it seems like, that we look at lately,
has a lower GDP growth number than the one before it," Mr. Falk
said. "So we're not expecting a snap back."
Industrial companies also reported a tough climate. General
Electric Co. and Honeywell International Inc. disappointed
investors by cutting financial forecasts for the year. And United
Technologies Corp. which reported strong third-quarter results,
warned that profits will be flat next year, weighed down by costs
of building new jet engines.
The recent year was "more difficult than we had expected,
impacted by a significant and unprecedentedly long global
industrial downturn that we expect to continue into 2017," said
Craig Rossman, Emerson Electric Co.'s director of investor
relations. The maker of InSinkErator garbage disposals and
White-Rodgers thermostats projected a sales decline of between 1%
and 3% in its current fiscal year.
For Host Hotels, record occupancies this year were accompanied
by weaker business-travel spending in the third quarter. At the
same time, high-end supply increased by about 2.5% this year in the
company's top markets, and supply is expected to increase more than
3% next year -- meaning the company would need to see demand
recover even more to give the firm pricing power.
"Companies are being very cautious regarding the fourth quarter
and any guidance that is being offered for 2017," Jim Russell,
portfolio manager at Bahl & Gaynor Investment Counsel in
Cincinnati. "Global growth remains a challenging dynamic."
Write to Theo Francis at theo.francis@wsj.com and Kate Linebaugh
at kate.linebaugh@wsj.com
(END) Dow Jones Newswires
November 06, 2016 18:05 ET (23:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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