Investors doubt good news amid profit warnings

5 min read

As Wall Street wraps up one of its worst quarters in recent memory Friday it should come as no surprise that profit warnings for the first quarter jumped nearly seven-fold from the year-ago quarter and most of this bad news came from the technology sector.

What might surprise some investors is the fact that a handful of tech firms that actually preannounced better-than-expected sales and earnings for the quarter have been hammered as much--if not more--than those who fessed up to varying degrees of decimation.

This time last year, any preannouncement of better-than-expected sales or earnings was typically good for at least a 20 percent or 30 percent pop in a company's stock price. Even money-losing (and now defunct) dot-coms were enjoying incredible run-ups after telling the Street to expect a loss of 45 cents a share in a given quarter rather than the 50 cents a share analysts had previously forecast.

Now investors are so gun-shy, they're afraid to buy shares in companies that are delivering strong sales and earnings growth despite the economic slowdown.

According to First Call, 196 companies from all industries preannounced sales and earnings targets in the first three months of this year, up 238 percent from the first quarter of 2000 when only 58 companies went out of their way to provide more accurate projections for their first quarter.

Of those 196 companies, 159—the majority being technology firms—forecast lower-than-expected sales or earnings for this quarter. Another 20 companies projected stronger-than-expected results and the other 17 confirmed their previous guidance.

In the first quarter of 2000, half of the 58 companies preannounced better-than-expected results. Nine companies said their earnings would be on target and only 20 warned of disappointing numbers.

Only 10 technology companies identified by First Call issued positive preannouncements this quarter: Ariba (Nasdaq: ARBA), Juniper Networks (Nasdaq: JNPR), Novellus Systems (Nasdaq: NVLS), SmartForce (Nasdaq: SMTF), Internet Security Systems (Nasdaq: ISSX), VeriSign (Nasdaq: VRSN), Veritas (Nasdaq: VRTS), webMethods (Nasdaq: WEBM), USinternetworking (Nasdaq: USIX) and Ciena (Nasdaq: CIEN).

Of those 10 overachievers, only Novellus Systems shares have appreciated since delivering the good news, up 20 percent to $46.50 Tuesday after predicting a profit of 68 cents a share back on Jan. 16. Analysts subsequently adjusted their consensus estimate to 67 cents a share shortly thereafter only to lower it back to 61 cents a share—below the original 62-cent-a-share estimate—in recent weeks.

The other nine stocks have been ravaged.

Ariba has tumbled to $10.06 after making its preannouncement at $43.38 on Jan. 11. Veritas dropped from $104.06 on Jan. 24 to $54.92 Tuesday. webMethods, which tripled its first-quarter estimate from a profit of 2 cents a share to 6 cents a share, plunged from $85.88 on Jan. 31 to $29.31 Tuesday.

"It's hard in this environment for investors to buy any stocks even when the guidance is raised by management," said Stephen Sigmond, an analyst at Dain Rauscher Wessels, who covers both webMethods and VeriSign. "But January (when the estimates were raised) is ancient history. Investors are having a hard time believing any good news right now."

In its latest quarter, webMethods topped analysts' estimates by 4 cents a share, earning $2.7 million, or 5 cents a share, on sales of $59.4 million. That $59.4 million in sales represented a 237 percent improvement from the year-ago quarter.

It raised its fiscal 2001 sales estimate to $205 million and predicted a profit of 6 cents a share in the first quarter—well above analysts' expectations.

"I believe we'll look back years from now when webMethods is not only a survivor but a major player in this space and wonder why investors were so skeptical about the stock at this point," Sigmond said. "It's clear that visibility for all software companies isn't as good as it was a quarter or two ago. "But we think it has better visibility than Wall Street gives it credit for."

Ciena finds itself in a similar position after raising profit estimates by a couple cents a share on Feb. 15 when the stock was trading at $89 a share. Now the stock sits at $53.81 a share, down 40 percent while Dell (Nasdaq: DELL), a company that cut its first-quarter profit estimate by 2 cents a share on the very same day, watched its shares improve from $25 to $27 a share in this same period.

It's worth noting that Ciena reported its strong first-quarter earnings and upbeat outlook on the morning of Feb. 15, sending its shares up more than $12 a share to that $89 a share mark. Later that afternoon, Nortel Networks (NYSE: NT), its largest customer, warned it would miss analysts' estimates by a mile this quarter and that it would lay off 10,000 employees.

Nortel wasn't done, however, as it issued another warning Tuesday, telling investors to expect a loss of between 10 cents and 12 cents a share this quarter.

"It's guilt by association," said Michael Perica, an analyst at Gruntal & Co. "People are really scrutinizing valuations for all stocks right now. We don't believe Ciena's fundamentals will materially erode. But the stock keeps falling in this more challenging environment."

The roll call of tech firms that preannounced lower sales and earnings this quarter reads like a "Dream Team" roster from years past:

Cisco Systems (Nasdaq: CSCO), Microsoft (Nasdaq: MSFT), Applied Materials (Nasdaq: AMAT), Nortel (twice), Yahoo (Nasdaq: YHOO) also twice, Sun Microsystems (Nasdaq: SUNW), Texas Instruments (NYSE: TXN) twice, JDS Uniphase (Nasdaq: JDSU) and Intel (Nasdaq: INTC) were just a few of the bellwethers to issue profit warnings this quarter.

Yet most of these underachievers' shares have weathered the storm far better than those companies that issued a positive outlook.

Microsoft is up $2.75 a share since its warning back on Jan. 18. Texas Instruments shares were trading at $48.56 when it issued its first warning. By the time the chipmaker issued its second warning on Feb. 26, the stock was trading at $29.15. On Tuesday, it closed at $36.25.

Cisco Systems hasn't been as fortunate, falling to $18.13 Tuesday from $35.75 on Feb. 6 when it warned that it would miss analysts' estimates in its third quarter.

But compared to VeriSign, down to $37.63 from $81.50 on Jan. 24 when it told the Street to expect another penny or two a share in earnings this quarter, Cisco is doing pretty well.

"The reality is investors don't want to buy stocks right now," Sigmond said. "Even when there's clear evidence that a company is winner, no one is willing to pay any kind of a premium for tech stocks."