Earnings picture for '09 fraught with uncertainty

NEW YORK (Reuters) - The investor checklist for the rest of 2008:

1) Stock market crash. Done.

2) Global bank rescue. Done.

3) Slash corporate earnings estimates. Pending.

With two of the most jarring events to hit markets in a generation now in the rear view mirror, investors have one more daunting task in front of them -- put a value on stocks in a hazy but clearly crumbling profit environment.

As it stands, average analyst expectations still show a rebound in corporate earnings late this year and through 2009, but many believe these estimates will soon be revised lower.

Uncertainty abounds about the depth of a potential U.S. recession, a sharp global slowdown and a raft of unprecedented moves being taken globally to counter the financial crisis.

“I don’t think company executives really have much of a clue right now,” said Michael Church, portfolio manager at Church Capital Management in Philadelphia.

“How can they give legitimate guidance going forward when so much is open ended at this point? It’s really going to be a question of what follow-through there is from this disaster we’ve had and if it is going to cripple the economy, because there really hasn’t been enough time yet to properly gauge this.”

On Tuesday, PepsiCo Inc cut its full-year outlook as the economic slowdown flattened soft-drink demand and did not give a forecast for 2009. The lack of an outlook for the year ahead weighed on PepsiCo’s shares due to investor concern about 2009, said Morgan Stanley analyst William Pecoriello.

Adding to the difficulty in predicting next year’s earnings are the many steps the world’s richest nations have taken to try to keep vitally important banks from failing and to unfreeze credit markets.

“The dollars that have flooded the system, the bailout packages, the nationalizations, it’s hard to keep track of it all and so many of them have been seminal in nature,” Church said. “Who knows? Maybe they fixed everything and next year, everything will be great. I’m not sure anyone has any definitive idea of where we are headed from here. But I do know that everyone is universally bearish,” Church said.

WANTED: A REALITY CHECK

Currently, analysts expect S&P 500 earnings to grow 24.5 percent in the first quarter of 2009, down from an estimate of 25.7 growth at the beginning of October, according to Thomson Reuters proprietary research.

“Earnings expectations for 2009 strike us as rather implausible,” said Brian Gendreau, investment strategist at ING Investment Management in New York.

“I think analysts will start taking down their 2009 numbers because we are undergoing a period of slow growth -- not just in the United States, but also abroad.”

Gendreau noted that companies that did best in 2007 were in the technology, materials and energy sectors, which benefited from global growth and the weak dollar. Investors will be keeping a close eye on earnings from abroad in those companies, he said.

“Globalized sectors have had a rollercoaster ride as have financials and consumer discretionaries,” Gendreau said, adding that companies in the health-care and telecom sectors may offer the best return for risk taken.

The other question is whether the market has pre-emptively priced in the probability of more earnings downgrades, even before analysts have ratcheted down their own expectations.

Since the beginning of the month, the Dow is down about 14 percent.

Craig Peckham, equity trading strategist at Jefferies & Company in New York, said the reaction of PepsiCo’s stock after its disappointing earnings and outlook may shed some light on this. While PepsiCo, like the market, has been beaten down over the past month, its stock fell another 10 percent on Tuesday.

“That tells us that there is risk here. Even though stocks are down a lot, expectations may not be low enough,” Peckham said.

Analysts currently expect earnings to fall 7.5 percent in the third quarter and rise 46 percent in the fourth quarter of 2008, according to Thomson Reuters data, though analysts have been cutting those estimates recently.

“We’ve seen the market start to price in a slowdown in the economy, but the consumer is a wild card. We’ve started to see a change in consumer psychology, which we will get a better read on when we get into the Christmas season,” said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

“Mix that together and despite all the stimulus we’ve had, it points to perhaps a protracted period of slower growth and difficulty in earnings,” he said.

“But there’s a lot of uncertainty. Nobody really knows what to expect.”