Issue of the week: Profit reports stoke new recession fears

Corporate bellwether General Electric delivered an earnings shocker last week, said Kathryn Kranhold and Mark Gongloff in The Wall Street Journal, sparking worries of a deeper-than-expected economic slump and sending stock indexes into free-fall. GE earned 44 cents a share from continuing operations in the first quarter, well below the 51 cents that analysts anticipated and 8 percent less than GE’s profit in the first quarter of 2007. The report, which came just weeks after CEO Jeffrey Immelt had assured investors that double-digit earnings growth was “in the bag,” suggested “that the global credit crisis and weaker economy are hitting the heart of American business.” Deepening the gloom on Wall Street were “disappointing results and profit warnings” from “other large, economically sensitive companies,” including Alcoa, UPS, and J.C. Penney. The spate of earnings disappointments undermined Wall Street’s prevailing expectation that “any economic downturn will be short and shallow.”

General Electric’s earnings report was also a personal blow for Immelt, said Reed Abelson and Louise Story in The New York Times. GE “has businesses as varied as finance and jet engines,” and thanks to its diversity, it has earned a reputation for managing “weakness in any given sector.” So what happened? Immelt explained that he had made his earlier, confident prediction of profit growth before markets were rocked by the near-collapse and the forced sale of investment bank Bear Stearns. The disruption caused by the Bear crisis made it impossible for GE to boost earnings, as it had hoped, by selling $900 million in real estate before the end of the quarter. But analysts were especially troubled by “management’s admission that it had been surprised by the severity of the credit crisis.”

Mega-corporations weren’t the only companies delivering unwelcome surprises to their shareholders, said Rick Aristotle Munarriz in TheMotleyFool.com. For instance, Crocs, “the trendy footwear maker” that has been a darling of growth-stock investors, indicated this week that first-quarter earnings will range from 8 cents to 15 cents a share, “far short of the 46-cents-per-share profit that Crocs had projected two months ago.” Although U.S. sales continue to grow, the news has shredded the credibility of Crocs’ senior executives. “If things deteriorated this quickly in less than two months,” how can investors believe management’s predictions over the next three quarters?

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The news from Europe was also discouraging, said Michael Steen and Richard Milne in the Financial Times. Philips, the Dutch conglomerate that is Europe’s answer to GE, announced a 75 percent drop in first-quarter profits, to $350 million, from $1.4 billion a year earlier. Philips’ announcement “revealed the extent of problems” in the company’s television division, especially in North America, “where neither its budget nor premium TVs have proven competitive.” The news only served to reinforce investor sentiment that the worst was yet to come. European stock markets plunged after Philips disclosed its earnings, “on fears of a broader corporate slowdown.”