Analysts Warn of Difficulty Prediciting Fallout From Asia

Analysts Warn of Difficulty Prediciting Fallout From Asia

by Jonathan Fuerbringer

Every earnings season can hold nasty surprises for investors. But with the stock market swooning lately over reports of financial turmoil in Asia and every lowering of profit expectations by a major American corporation, some analysts are worrying that the shocks in early 1998 will be particularly unpleasant.

But, as they scour Asia for signs of where its economies -- and orders for American goods and services -- are going, analysts and corporate executives are warning of the difficulty of predicting the fallout from the spreading crisis there.

"It's a very complicated issue," said Thomas Doerflinger, an investment strategist at Paine Webber. "Costs are being changed by shifts in currencies and demand flows in each country. It's tricky."

And many strategists are cautioning that the bad news from Asia will show up more sharply in the reports for the first quarter, which do not come out until spring, than in those that will be issued in January and February.

"What is coming up will give us some clues but not the final story," said Eric Miller, chief investment officer at Donaldson, Lufkin & Jenrette in San Francisco. The shutting of factories, the impact of tighter credit and the mass layoffs will not be fully reflected in the fourth quarter, he said, adding, "The real pain is still ahead."

With American high-technology stocks showing greater volatility lately than those in many other industries, the efforts of two closely watched companies to assess the impact of Asia's economic woes on their earnings prospects show the uncertainty that investors face.

Intel Corp., the world's top maker of integrated circuits, says the impact has been negligible -- so far, that is, and as best as it can make out. Some of the worst-hit countries, like Indonesia, are not major markets for its products, the company says. And Japan, which has been limping along economically for years, had not been expected to generate significant new orders anyway.

As a result, said a spokesman, Howard High, Intel is keeping a close eye on China and India, trying to gauge whether their economies -- and their demand for Intel's chips -- will slow because of the fallout from the rest of Asia next year.

But, he said, it is too early to tell if there has been any significant change in the company's prospects in those two countries. This means that Intel's fourth-quarter earnings report, due out in the second week of January, may not tell the full story.

The same uncertainty applies for investors in Applied Materials, the world's largest manufacturer of computer-chip-making equipment. Although the company surprised Wall Street with better earnings than analysts expected for its fiscal fourth quarter that ended in October, investors have since then pushed the company's stock price down 42 percent because the company does more than half its sales in Asia.

"The bottom line is that we don't know yet," said Jeff Lettes, a company spokesman. "Right now with what is going on in South Korea, our customers are trying to figure out in which direction they wantto move. And we have to wait until those decisions are made."

For example, Korean chip makers may find it difficult to buy the next generation of chip-making machinery right now. But on the other hand, many analysts believe they will have to do so, whatever the cost, to stay competitive.

The turmoil in Asia, combined with signs that the American economy may be peaking after years of strong growth, has divided analysts on the earnings prospects for American industry as a whole.

Abby Joseph Cohen, co-chairwoman of the investment policy committee at Goldman Sachs & Co., remains upbeat. Ms. Cohen said that the fourth quarter "is the most difficult to parse for analysts" because the write-offs companies take at the end of the year are usually much larger than in any other quarter.

But, she said, "I think the whole quarter is going to be pretty good," adding that signs from some of the banks and financial companies that will lead off the reporting season are positive. Companies are saying that the Asia factor "will not be a big deal," she said.

Doerflinger of Paine Webber, by contrast, believes that current consensus earnings estimates in the low double digits for American industry as a whole in 1998 are too high.

No matter how the final earnings reports come out, the worry about Asia and the expectation of slower growth in the United States next year have led analysts to scale back their earnings projections for the last three months of this year.

According to First Call, a Boston-based firm that tracks earnings estimates by analysts around the country, the forecast for the 500 companies in the Standard & Poor's index has been revised downward over the last five weeks, to an increase of 8.3 percent from a year earlier, compared with an earlier prediction of an 11.2 percent gain.

Chuck Hill, the director of research at First Call, said the downward adjustment was much sharper than usual and raised questions about the earnings outlook for the first quarter of next year and for all of 1998.

Currently, analysts expect first-quarter earnings to rise by 17 percent from the first quarter of 1997; their projection for 1998 as a whole, however, has slipped in just the last week to a 14 percent increase over 1997 from an earlier guess of 14.4 percent.

In recent quarters, actual earnings have ended up matching analysts' original projections, and surpassing their more pessimistic subsequent revisions, because positive developments have offset any bad news that had dribbled out earlier. But Hill said that there is "no way" that will happen this time around.