Analysis: Worried about 2013, U.S. CEOs raise caution flag

BOSTON Wed Aug 1, 2012 6:10pm BST

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BOSTON (Reuters) - Don't get your hopes up for next year.

That is the message from a handful of top U.S. corporate executives who have begun to answer Wall Street's questions on their financial forecasts for 2013.

"There is demand reduction, no question," said Andrew Liveris, CEO of Dow Chemical Co (DOW.N), who noted that a recovery in demand the chemicals company had previously expected to see in 2013 might not happen until 2014.

Europe's debt crisis sharply hit sales on the continent in the second quarter, a phenomenon that is worsened by a weakening euro, which saps the value of U.S. companies' European sales. Demand is also cooling in formerly reliable growth markets including China, India and Brazil.

At home, U.S. companies face the risk of the fiscal cliff -- a combination of tax hikes and automatic spending cuts that will take effect at the end of the year if lawmakers in the Democratic-controlled Senate and Republican-controlled House are unable to reach a compromise. The cuts could take a toll on both consumer and government spending and cause the economy to stall, some analysts fear.

"Companies are much more cautious, much more guarded with their estimates," said John Carey, who manages the Pioneer Fund and Pioneer's Equity Income Fund, with about $11 billion in assets under management. "You don't need a full-scale economic setback to have reduction in earnings, we just need a fairly slow growth rate with rising costs."

Analysts have lowered their fiscal 2013 profit forecasts. On average, Wall Street expects the companies in the Standard & Poor's 500 index .SPX to grow earnings 11.9 percent next year, a forecast that has been cut by a 0.5 percentage point since July 1, according to Thomson Reuters I/B/E/S.

The sharpest cuts have come in the energy sector - where analysts now expect earnings to grow by 7.9 percent next year, compared with a 10 percent forecast as of July 1 - and the financial sector, where analysts now forecast 13.2 percent profit growth in 2013, below their prior 15.1 percent forecast.

The drop in the energy sector forecast reflects falling oil prices. Oil prices have declined about 18 percent since March, taking a toll on energy producers' profits.

Analysts have lowered their average 2013 earnings estimates for the energy, financial, industrial, technology and utility sectors since July 1 and have raised them for the consumer discretionary, consumer staples, healthcare, basic materials and telecommunication sectors.

Analysts have also lowered their revenue forecast and now expect the 500 companies in the index to boost sales by 3.9 percent next year, down from a 4.1 percent growth target as of July 1.

REVENUE A WORRY

Of the more than 300 companies in the S&P 500 that have reported second-quarter calendar results so far, 60 percent have missed revenue forecasts, growing sales by just 1 percent on average. While 67 percent have bested earnings expectations, investors worry that is not sustainable.

"Corporate America has been able to squeeze out continued earnings increases through expanding margins ... that can't go on forever," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. "Certainly the signal here is, 'Don't expect a lot of revenue growth as we move into 2013.'"

In addition to keeping a tight rein on hiring, many manufacturers have relied on lower raw materials costs to boost profit margins.

3M Co (MMM.N), one of many U.S. manufacturers to offset weaker-than-expected sales growth by cutting costs, told investors those margins reflected declining costs for some of its raw materials, from polypropylene to paperboard for packaging.

Those costs will not remain as low indefinitely, warned Chief Financial Officer David Meline.

"As demand improves and as the outlook for economic activity improves, we would be naive if we thought prices would stay down," Meline said.

NO SIGN OF EUROPEAN TURNAROUND

U.S. companies have by and large reported weak results in Europe this year, both because of soft demand as governments and consumer tighten their belts and because the strength of the U.S. dollar sapped the value of sales in the eurozone.

Corporate chiefs cautioned investors not to expect any quick improvement in European demand, a message Wall Street seems to have taken to heart. Analysts expect first-quarter 2013 earnings for the S&P 500 companies to rise just 7 percent, better than the current quarter's forecast 1 percent decline but well below the 2013 full-year forecast of 11.9 percent growth.

"We don't believe that there will be any uptick in Europe or China in the fourth quarter," said Sandy Cutler, CEO of Eaton Corp (ETN.N), which makes electrical and hydraulic systems used in trucks. "We see that now pushing into next year."

Companies that took a brighter view of 2013 made the argument that after a year of economic crisis in Europe, and with the U.S. presidential election coming in November, there will be fewer surprises next year for the world economy.

"You look at what 2013 could look like versus 2012, I can't imagine with the degree of uncertainty we have in the U.S. today we don't have greater clarity in '13," said Ed Rapp, chief financial officer of Caterpillar Inc (CAT.N).

More CEOs took the approach of General Electric Co (GE.N) CEO Jeff Immelt, striking a note of caution

"We prepared ourselves for a pretty tough year this year, or certainly a volatile year. We haven't been disappointed," Immelt said. "We are going to be equally prepared when we think about '13."

(Additional reporting by Nick Zieminski in New York; Editing by Bernard Orr)

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