AN INVESTOR'S VIEW CROESUSA STEADY stream of corporate financial reports contines to hit the newswires, particularly from US-quoted companies which are obliged to report each quarter.
The economic data released since Christmas has been unrelentingly gloomy and market participants have been primed to expect poor financial results. Nevertheless, Wachovia, the fourth-largest US bank, managed to surprise the market this week by announcing a quarterly loss due to large market writedowns, the cutting of its dividend and plans to raise $7 billion in capital.
A day later, JP Morgan Chase assuaged market nerves a little when it announced results in line with market expectations. Quarterly profits did, however, still decline by 50 per cent due to $5.1 billion of writedowns and provisions linked to the collapse of the sub-prime market and bad home equity loans.
Investment analysts had expected worse and comments from chief executive Jamie Dimon that the credit crisis was nearing an end served to bolster market confidence. In the technology sector, Intel, which has a large facility in Ireland, reported a rise in Q1 sales of 9.3 per cent to $9.6 billion. The share price rose on the day as management expressed confidence that second-quarter sales revenues would be in the $9 billion to $9.6 billion range. Chief executive Paul Otellini stated that economic weakness was not hurting demand.
This positive performance from a market heavyweight served to bolster the view that profit falls may not be as bad as feared. According to analyst estimates compiled by Bloomberg, earnings at companies in the S&P500 are forecast to fall 12.3 per cent year on year in the first quarter and 3.8 per cent in the second quarter.
Closer to home one of the market's small-capitalisation companies - the recruitment company CPL Resources - issued a profits warning indicating that it expects profit before tax for the year to June 30th, 2008, to be "approximately 15 per cent below current market expectations".
The statement highlights that "the reduction in economic growth and activity in Ireland and elsewhere in recent months has had an adverse effect on many of the markets that CPL operates in". CPL's market capitalisation is only approximately €140 million and so its performance does not have any significant implications for overall market sentiment. However, it does provide hard evidence from the business sector that is consistent with some of the recent very weak macroeconomic employment data. CPL noted that employment activity, particularly the recruitment of permanent staff, has declined.
While CPL operates across all business sectors, it does have a significant exposure to the multinational sector and the financial services sector, which are being affected by the US recession and the credit crunch. The combination of recession in the overall US economy and the ongoing ramifications of the credit crunch are bound to have a negative impact on recruitment in US multinationals and also in IFSC companies. While CPL's earnings will be under pressure for as long as the economy remains weak, the company has entered the slowdown with a strong balance sheet with net cash of €30 million at end-December 2007. Strategically, the company has stated its intention to acquire overseas business in order to diversify geographically, so that on the positive side the current weak economic environment may throw up some interesting expansion opportunities.
Despite positive aspects to some recent corporate results it is hard not to conclude that we are still in the early stages of this economic and market downturn.
