STREETWISE: Profit shortfalls may bite in 4Q

If you’ve never paid attention to earnings before, now might be a good time to start.

For the past few weeks, announcements from companies warning that they will not meet earnings estimates for the third quarter have been gathering like crows on a wire.

Across the board – but with a particularly heavy concentration in retail consumer cyclicals – companies are citing the weak euro, energy costs and a slowing U.S. economy as reasons for not meeting analysts’ estimates.

Leading up to this week – when earnings reports for the third quarter will begin the first and biggest wave of a four-week reporting season – there were 79 pre-announcements from companies in the S&P 500 stock index. This represents a 79.5% jump from the same time last year, according to First Call Corp. of Boston.

Of the 6,000 companies in the First Call universe, 416 have warned that they will not meet earnings estimates for the third quarter. This is up 27% from the number of companies that issued such warnings in the same period last year.

What is unique about this increased trend is that it is seen across the board in companies like Home Depot Inc., J.C. Penney Co. Inc., Whirlpool Corp., Goodyear Tire and Rubber Co., Circuit City Stores Inc. and Land’s End Inc.

The retail sector, which doesn’t wrap up its third quarter until the end of October, will be watched closely given the above-average number of earnings warnings.

In an interesting twist, pre-announced warnings from the technology sector – where warnings are most common – are not way up this year.

Through last week, 77 technology companies out of 6,000 in the First Call universe issued earnings warnings. This compares to 75 companies issuing warnings at the same time last year.

“It’s not technology where the problems are, it is the other areas,” says Chuck Hill, First Call’s research director.

But despite the increased number of warnings, the result has been “the normal trimming of estimates” by analysts, says Mr. Hill.

According to First Call, on July 1 analysts estimated that the third-quarter earnings for companies in the S&P 500 would be up 18.8% from the third quarter of last year.

However, as of Friday, that estimate had dropped to 15.9%. Overall, Mr. Hill says, the index will probably have improved by about 18%.

But at this point, it’s not the third quarter we need to worry about.

Mr. Hill says the big things driving down earnings for the third quarter – a weak euro, energy costs and the U.S. economy – are likely to have a greater impact in the fourth quarter and beyond.

“I still think people should be worried about these warnings – not because of what it will mean in the third quarter,” he says, “but because of what it could mean in the fourth quarter.”

Mr. Hill says that the true bottom is not likely to occur until sometime next year as earnings growth typically lags the economy by about a quarter.

But, he adds, now is the time to focus on what companies say about their outlook for the next few quarters.