Global corporate earnings tumble led by energy firms

Washington: Corporate earnings are heading for a fifth straight quarter of declines, dragged down mostly by energy companies’ struggles with low oil prices and a tepid global economy that threatens to throttle sales growth in many industries.
United States companies as varied as hamburger chain McDonald’s and Honeywell International, a maker of gas-processing equipment and cockpit controls, have slashed costs and bought back shares to help earnings. Amid a worldwide sales slog, European pay-TV operator Sky and South Korea’s Hyundai Heavy Industries are crimping expenses to boost profit.
John Carey, a Boston-based fund manager at Pioneer Investment Management, calls it earnings engineering, and he’s seen it before. Companies have grappled with a lacklustre economy for several years as the US manufacturing recovery sputtered, the world economy slowed and oil prices fell to $50 a barrel from more than $100 in 2014.
“There hasn’t been a lot of what you might call real, honest earnings growth through sales and business improvement and expansion of operations,” said Carey, whose firm oversees about $240 billion of equities and fixed income worldwide. “They just keep digging deeper into the hat and finding hidden rabbits and new ways to generate earnings.”
The global economy is forecast to expand 2.9 per cent this year, according to the average estimates of economists surveyed by Bloomberg. That’s the lowest rate since 2009, with the US, European Union, China and Mexico all expected to post slower growth this year from 2015.
With about two-thirds of Standard & Poor’s 500 Index members having reported, earnings have declined 3.3 per cent from a year earlier and sales have slumped 0.5 per cent. Excluding results from energy companies, earnings have risen 1.1 per cent and sales have gained 3 per cent.
Asia and Europe have fared worse. With 294 companies on the MSCI AC Asia Pacific Index having announced results, earnings have plummeted 19 per cent. In Europe, profits have dropped 14 per cent with results in from almost two-thirds of companies on the Stoxx Europe 600 Index.
With the third quarter in full swing, there are reasons to remain cautious, said Mark Luschini, chief investment strategist at Janney Montgomery Scott, which manages $54 billion. Operating profit margins for the S&P 500 fell below 12 per cent for the first time since 2010 and may deteriorate further as wage pressure begins to kick in.
Margin decay
“There’s been margin decay over the last couple of years, and I expect we’re going to continue to see that more if we see hiring and wage gains occur,” Luschini said. “That will only put further pressure on margins in the absence of top-line revenue growth.”
In the second quarter, oil producer ConocoPhillips posted a loss of $1.1 billion, its fifth straight. Caterpillar Inc., the large maker of earth-moving equipment, lowered its forecast for 2016 sales and earnings for a second time after posting a 16 per cent decline in second-quarter revenue.
Sony Corp. earnings per share dropped 76 per cent in the three months ended June on an 11 per cent decline in sales. Profit at Mitsui OSK Lines, Japan’s second-largest shipping company by market value, slumped 89 per cent.
The earnings decline for S&P 500 companies probably hit bottom with the first quarter’s 6.7 per cent drop. Profits are expected to resume growth this quarter, although a big reason is that companies will lap profit weakness that began a year earlier, said Jill Carey Hall, a US equity strategist with Bank of America.
“We definitely need to see a pickup in sales growth to make us be a bit more positive on the trajectory for the market,” Hall said. “We have been stuck in this slow, sluggish sales-growth environment, and you’re finally seeing some very early signs of a pickup.”
Brexit looms
Any fragile recovery of earnings could be hurt by Britain’s decision to leave the European Union, the so-called Brexit, which has made companies more cautious as they sort out the effects, Hall said. There are also concerns related to the US presidential election and an increase in terrorist attacks across the globe.
For General Motors, Brexit “has put a strain” on the UK auto market. Coupled with the weaker pound, that could hurt revenue by $400 million in the second half of this year, chief financial officer Charles Stevens said. At Ford Motor, CFO Bob Shanks said Brexit will cost his company about $200 million this year, rising to $400 million to $500 million in 2017.
UK broadcaster ITV, known for the drama series “Downton Abbey,” is aiming for cost savings of £25 million ($33 million) in 2017, including job cuts, as it prepares for what it described as uncertainties in the economic outlook following the country’s vote to leave the EU.