GO
Loading...

European Earnings to Hold Up in First Quarter

European corporate profits for the first quarter of 2008 are expected to hold up, but weaker economic growth resulting from the credit crisis and a stronger euro will take their toll on earnings later in the year.

Auto, capital goods, technology and pharmaceutical sectors are the most vulnerable to the strong euro, which gained 8 percent against the dollar during the quarter, while higher raw materials costs would also crimp profits.

"Earnings in the first quarter will be okay but the guidance will be perhaps slightly disappointing, partly because of the currency. Then as we come towards the end of the year, earnings will actually start falling in year-on-year terms," said Nick Nelson, head of European strategy at UBS.

"What Europeans tend to do is to follow the U.S. with a one-year lag. If the U.S. is in recession right now, then the worst point for Europe would probably be in the beginning of next year," said Nelson, who forecast zero growth for 2008 European earnings with a high downside risk.

Morgan Stanley, Goldman Sachs and Citi, however, were more pessimistic as they expected a 10 to 16 percent fall in European corporate earnings this year.

Goldman expected a 10 percent drop in earnings for non-financial companies, while it saw a 20 percent decline for financial stocks.

The euro zone economy is expected to grow 1.6 percent in 2008, down from an estimate of 2.7 percent growth in 2007, according to a Reuters poll.

"Companies are only as good as their order books and their order books are lagging indicators," said Philip Lawlor, chief portfolio strategist at Nomura.

"We still have a quarter to go before companies start giving harder guidance to analysts. We are still in a bit of no man's land with the earnings."

First-quarter results will start to trickle in the next few weeks.

Dutch chip equipment maker ASML is due to release its report card for the first three-month on April 16 while Nokia follows on April 17.

Germany's Daimler stuck to its 2008 and medium-term earnings targets on Wednesday, confident that its focus on premium cars would help it weather an economic slowdown.

However, Dutch navigation device maker TomTom on Tuesday lowered its 2008 revenue outlookafter cutting prices for its personal navigation devices during the first quarter.

Bear or Bull?

Nevertheless, European stock markets have been on a rally from their lows made on March 17, with the FTSEurofirst 300 gaining nearly 10 percent since then.

Morgan Stanley said the market was more than halfway through a bear rally, and beyond that it expected directionless markets until earnings trough.

"At some point, the earnings recession takes over again as the driving force in this market, but possibly not in the upcoming reporting season yet, as this one will not reveal the full extent of the earnings recession," the broker said in a report on Monday.

Lehman Brothers, on the other hand, said earnings revisions had bottomed and the rally would turn into a "bull run" rather than another bear market bounce.

"We continue to favor financials, consumer cyclicals and tech -- all three have had aggressive downgrades and should outperform in a rally," Lehman said in a note on April 4.

Still, previous recessions showed earnings downgrades would hit bottom after 12 to 18 months into the cycle and with only six months of into the current cycle, many still expected more pains to come.

"You obviously have got high input cost pressure because of raw materials rising. You've got some wage pressure coming through, particularly somewhere like Germany, and you've got the currency in $1.50-1.58 (to one euro), which is problematic for European companies," UBS's Nelson said.

Featured