COMMENTARY--This earnings season investors will be required to read the lines more so than ever. Given that we know the numbers will be ugly, it'll be the little things that move stocks.
Here are a few burning questions:
Where's the "visibility?"
By visibility, we mean that outlook thing. Companies don't have to project strong results for the next quarter and fiscal 2001, they just have to show they can predict something.
Numerous companies have refrained from predicting earnings and revenue for the fiscal year. Until some solid, attainable projections are given there'll be a gaping hole left on Wall Street.
The forecasts will become increasingly important as earnings season wears on. For instance, when Yahoo (Nasdaq: YHOO) reports earnings on April 11, it's not going to have much insight to the second quarter or fiscal 2001. Why? Business was bad when Yahoo issued a profit warning a few weeks ago, and it's still bad. Yahoo will base it second-quarter and fiscal-year projections on only 11 days of data.
With any luck, companies that report earnings near or after May 1 will have a much better outlook. These firms will have a month of the second quarter under their belts and could have more insight. With that in mind, the conference calls from Dell Computer (Nasdaq: DELL), Hewlett-Packard (NYSE: HWP) and Cisco Systems (Nasdaq: CSCO) will be pivotal in turning sentiment around.
On conference calls, it'll be time to listen for a lot of intangibles when it comes to inventory. Which companies have burned through the inventory glut, and which ones still need a few quarters to do it?
By most counts, PC vendors have had a lot of success burning through inventory. According to analysts, PC makers have done a nice job of eliminating a glut of boxes.
Networking equipment companies, however, will take a few more quarters to clear out the excess supply. But even those companies may show improving inventory levels.
"One thing's for sure: By the time inventories (or lack of the same) is recognized as a problem, the process of eliminating the problem is already underway," said Tad LaFountain, an analyst at Needham. "It may be through consumption, it may be through write-downs, it may be by sales to the gray market or it may be by trips to the landfill, but the process seems to work."
Is Europe seeing an economic slump or not? Analysts said recent earnings from Tech Data (Nasdaq: TECD) may indicate that Europe's economy is being dragged down by problems in the United States.
If that's the case, a rebound may not come anytime soon. That means investors will have to wait for information technology spending to pick up in the United States, and then hope it props up Europe.
So far results are mixed. Tech firms issuing profit warnings are split about prospects in Europe. Many companies note that business is slow in Europe, but a select few are still doing well.
Will IBM warn?
The consensus view is that IBM (NYSE: IBM) is one of the few tech companies that can weather a downturn.
The company's earnings are likely to be in line with estimates, but will the company stick to its 2001 projections? Analysts, who are expecting IBM to report earnings of $4.90 for the year, are expecting Big Blue to tone down its internal projections for 2001. Europe's economy will play a big role in IBM's outlook.
"IBM probably has enough going for it this quarter to make or come close to making expected results," said Goldman Sachs analyst Laura Conigliaro. "After that, the challenges escalate.
"With 50 percent of its profits annuitylike, IBM is better off than most, but will still be affected by the current economic slowing."
Even if IBM warns, investors may cut the company some slack. IBM is still the most diversified tech company out there. Under Conigliaro's worst-case scenario, IBM shares would fall to $80.
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