Gloomy earnings season likely, analysts say

Nary a Wall Street investor is surprised that third-quarter earnings reports due in the coming weeks are predicted to be a washout.

Those waiting for some good news in a market that lost more than $7 trillion over the past 12 months ought to be prepared to do just that: wait.

Analysts forecast down earnings reports for the third quarter, the fourth quarter and probably the first quarter of next year.

Acuity Brands, an Atlanta-based lighting company, on Tuesday kicked off the fall earnings season among Georgia companies by reporting an 18 percent profit drop and plans for 800 job cuts.

Many of the state’s public companies will post their numbers in the next two weeks. Analysts expect lower earnings at 11 of the 25 Georgia companies in the Fortune 1000. Two are projected to lose money.

“The news is not going to be good,” said Jeff Humphries, director of the Selig Center for Economic Growth at the University of Georgia’s Terry College of Business. “Any consumer-focused company is going to suffer unless they’re selling very, very basic products that you buy despite the up and down cycles of the market.”

That could explain why breadmaker Flowers Foods and even credit information giant Equifax should do well despite the downturn.

Analysts are projecting that Thomasville-based Flowers will earn 29 cents per share in the third quarter compared with 24 cents in the year-ago quarter. The company has raised prices and trimmed expenses over the past three years.

In a tight economy with ever-stingier credit requirements, Equifax is expected to see a boost in activity for its reports from lenders scrutinizing borrowers and consumers looking to protect their credit ratings.

Though the crisis that started in the home mortgage sector bled into the broader financials — both retail and investment banks — the current environment underscores how interdependent seemingly unrelated industries are. And that reality led to a cascade of problems resulting in lowered earnings expectations for the next several quarters.

Case in point: Mohawk Industries. Wall Street expects the company to report earnings per share of $1.14 compared with $1.78 in the year-ago quarter and full-year earnings of $4.48 per share in 2008 vs. the $10.32 it earned in 2007.

The fundamental operations of the Calhoun-based flooring and carpet maker didn’t change, but like many Georgia firms, Mohawk’s issues reflect the broader downturn in home building.

“I don’t see a lot of growth in the near term for Mohawk,” said Ted Parrish, a principal and a director of investments at Kennesaw-based Henssler & Associates, which has $1.3 billion under management.

“I just don’t think there’s any light at the end of the tunnel for any housing-related stocks, and this includes Mohawk.”

It explains why Mohawk, whose shares have fallen more than 40 percent in the past 12 years, has taken some defensive measures such as shutting down four plants in North Georgia this year, resulting in the loss of 820 jobs.

The housing market woes were bad enough, but with banks spooked about lending in general, that’s made it a lot more difficult for companies to borrow money. The longer that continues, the worse it is for the economy and ultimately investors, said Alec Young, equity strategist at Standard & Poor’s Equity Research.

“If banks don’t want to make loans, it’s really bad for the economy. There’s a tremendous amount of nervousness out there not only for the third or fourth quarters but for ‘09,” Young said. “That’s why it’s so important for the credit markets to try to respond. As long as credit markets remain tight so will earnings.”

And for companies that were already pummeled by high costs for oil and other raw goods, tightening credit can only make things worse.

Georgia Gulf Corp., which has roughly $1.4 billion in debt, suspended its dividend last month and sold several assets valued at more than $31 million in the first half of the year.

Wall Street expects the company, whose chemical and plastics products are linked to the home building industry, to post a loss of 27 cents per share in the third quarter, compared with a loss of a penny per share in last year’s comparable period.

Investors in the Atlanta company have already seen their shares slide more than 83 percent in the past 12 months.

“It’s extremely difficult especially if the nature of your business is highly cyclical in the first place,” Parrish, the Henssler & Associates principal, said of the current credit market environment.

“If you see a company that doesn’t have those types of [credit] facilities, those are companies that are probably hanging by a hair, anyway.”

Georgia Gulf is trying to refinance its debt, and the company’s current picture is “worrisome,” Parrish said, but since petroleum costs have decreased in the past few weeks, that should help sustain margins, he said.