World Economy

Corporate Earnings Tumble, Sales Slog

Corporate Earnings  Tumble, Sales SlogCorporate Earnings  Tumble, Sales Slog

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.

US companies as varied as hamburger chain McDonald’s Corp. and Honeywell International Inc., 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 Plc and South Korea’s Hyundai Heavy Industries Co. are crimping expenses to boost profit, Bloomberg reported.

John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., calls it earnings engineering, and he’s seen it before. Companies have grappled with a lackluster 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% 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% from a year earlier and sales have slumped 0.5%. Excluding results from energy companies, earnings have risen 1.1% and sales have gained 3%.

Wisdom Demands Caution

 Asia and Europe have fared worse. With 294 companies on the MSCI AC Asia Pacific Index having announced results, earnings have plummeted 19%. In Europe, profits have dropped 14% 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 LLC, which manages $54 billion. Operating profit margins for the S&P 500 fell below 12% for the first time since 2010 and may deteriorate further as wage pressure begins to kick in.

 “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% decline in second-quarter revenue.

Lapping Weakness

At the Sony Corp. earnings per share dropped 76% in the three months ended June on an 11% decline in sales. Profit at Mitsui OSK Lines Ltd., Japan’s second-largest shipping company by market value, slumped 89%.

The earnings decline for S&P 500 companies probably hit bottom with the first quarter’s 6.7% 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 Corp.

For General Motors Co., 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 Co., 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 Plc, 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.