Is Good News Really Good News?

Lots of positive earnings surprises and two ways to interpret Moody's credit data.

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Maybe, just maybe, the economy is bottoming.

For one day, at least, senior executives and investors can be hopeful after three high-profile companies reported quarterly results that offered reasons for optimism.

The biggest news: Microsoft said after the markets closed on Wednesday that fiscal fourth-quarter revenues would come in at $6.5 billion to $6.6 billion, up from previous guidance of $6.3 billion to $6.5 billion.

The markets reacted ebulliantly to the news.

Of course, it also announced that it will record a first-ever investment loss of $2.6 billion.

Motorola, meanwhile, also offered a bit of encouraging news, if you are in the mood to be an optimist.

Sure, it reported a second-quarter operating loss of $232 million, or 11 cents a share, excluding special items. And, yes, it compares with an operating profit of $551 million, or 25 cents a share, in the same period last year.

And, yes, Motorola warned in April that earnings would come in a few pennies worse than the first-quarter loss of 9 cents per share.

However, analysts then predicted, on average, that the quarterly loss would amount to 12 cents per share. Presto! Motorola beat expectations.

What’s more, handset sales came in at $2.5 billion. Estimates called for $2.2 billion to $2.3 billion. Handset orders, which reflect the future, amounted to $2.9 billion versus an estimate of $2.8 billion.

And, although its semiconductor loss far exceeded estimates, the company predicted double-digit growth for next year.

Then, there was Yahoo.

Sure, the one-time profitable Internet company—not a small feat–wound up reporting pro forma earnings of one penny per share. The consensus forecast called for a breakeven quarter.

“Q2 results were better-than-expected with a little bit better-than- expected top line,” UBS Warburg analyst Chris Dixon told Reuters. He added that the company showed strong earnings excluding interest, taxes, depreciation and amortization, which suggested it was making “significant operational changes in their core operations.”

Alas, its net loss was $48.5 million, which includes all restructuring and acquisition costs. Last year, it reported net earnings of $53.3 million.

Meanwhile, positive earnings news came out of a number of non-tech companies as well. They include:

  • Wal-Mart Stores Inc. said that June same-store sales surged by 6.9 percent, much higher than Wal-Mart’s and Wall Street’s forecast of just 3 to 5 percent.
  • Paper products company Willamette Industries Inc. said that second- quarter earnings rose about 6 percent, to $70.8 million, or 64 cents per diluted share, two pennies better than the consensus forecast.
  • Enron Corp., the energy marketing and trading giant, said second- quarter earnings jumped nearly 40 percent, beating the average Wall Street estimate by 3 cents.
  • First Union said its operating earnings came in three pennies per share ahead of expectations even though they fell by 9 percent.
  • Harris Interactive Inc., the polling company, said that it expects its fiscal fourth-quarter loss to be smaller than analysts’ forecasts due to growth in health-care research and to cost-cutting.
  • Personal care product maker Helen of Troy Limited said that stronger demand for its products boosted its fiscal first quarter results and also raised its earnings and sales estimates for the full year.

Moody’s Says Corporate Credit Quality is Weakening

There are also two ways to interpret Moody’s recent report on credit quality.

The credit rating agency said that the credit strength of U.S. corporations fell sharply in the second quarter of 2001 as rating downgrades outpaced upgrades by a factor of three-to-one.

This was the 13th consecutive quarter of credit deterioration, especially in the industrial sector.

And, Moody’s warned of decidedly negative trends over the next three months.

“Credit trends remain particularly negative in the industrial sector, as weaker demand and pricing power, declining profit margins and plunging capacity utilization have diminished debt repayment capabilities,” it said in a press release. “Moreover, a strong dollar has weighed on corporate America’s ability to generate cash. Not only has the global price competitiveness of U.S.-based companies been reduced, but the dollar-value of foreign currency earnings from overseas operations also has been diminished.”

Even so, Moody’s said downgrades for U.S. companies fell to 152 in the quarter ended June 30 from 176 in the first quarter and 153 in fourth- quarter 2000.

And Moody’s upgraded the bonds of 58 companies during the second quarter, seven more than the 51 in the first quarter and 23 percent more than the 47 in the fourth quarter of 2000.

However, the net result of these actions is that downgrades far exceeded upgrades.

Altogether, $148.2 billion of bonds were downgraded last quarter, compared with $259.6 billion in the first quarter, and $373.5 billion in fourth-quarter 2000. These are also clearly encouraging numbers.

And, the amount of debt upgraded totaled $80.4 billion last quarter, $28.8 billion in the first quarter, and $257.6 billion in the last period of 2000.

Meanwhile, a total of 52 companies were put on review for possible downgrade last quarter, compared with 39 reviews for possible upgrade. This is an improvement from the 66 reviews for downgrade and 29 reviews for upgrade initiated during the first quarter, and an even more dramatic turn from the 91 downgrade reviews and 27 upgrade reviews during fourth-quarter 2000. When a company’s rating is put on review, the review generally concludes within three months, Moody’s noted.

Today’s Layoff News

  • AOL Time Warner Inc. cut about 30 people in its interactive marketing group, according to Reuters.

From the CFO.com “Brief” Case

  • A jury award against American Home Products Corp. regarding alleged health damage from the “fen-phen” diet drug cocktail has been reduced substantially, to $9.2 million from $56.5 million.
  • Alliance Capital Management LP filed a shelf registration to sell up to $600 million in debt securities and warrants.

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