Starting this week, companies will begin announcing their third quarter results. For most of the companies in Orange County, this earnings season could be best classified as miserable. Already, one by one, companies here have announced warnings of their third quarter profits falling or disappearing as a result of a slowing economy and lower consumer confidence.
Whether it is technology, healthcare, finance or some other sector, companies in OC have joined the roll call of the corporate walking wounded. Since June, 10 of the 20 companies in the Billion Dollar Club have warned that they wouldn’t meet their performance numbers for the third quarter. Likewise, 14 of the companies in the OC 50 index said that they wouldn’t meet their earlier expectations. The Billion Dollar Club is an index of OC-based stocks with market capitalizations of more than $1 billion. The OC 50 is another 50 companies with market caps of more than $25 million.
“Overall, the slowdown in the economy has impacted everybody,” said Gordon McBean, a consultant at Newport Beach-based Roth Capital Partners LLC, which maintains both indices.
Orange County has a high concentration of technology companies that have fallen victim to cuts in corporate and retail demand.
Take Irvine-based Broadcom Corp., which was among the fastest growing chipmakers in the United States and was at one time the most highly valued company in Orange County. On July 18 it announced a loss for the second quarter compared to a gain a year earlier, on a 14% decrease in revenue. The company also said that its third quarter earnings would be flat compared to the second quarter. The company has said that it expects fourth-quarter revenue to be modestly up from the third quarter.
Newport Beach-based Conexant Systems Inc. also said in July that its revenues in the third quarter would be slightly lower than in the second.
Fluor Corp., the Aliso Viejo-based engineering and construction company, is another firm that told investors and analysts that its previous expectations were too high. On July 31, Fluor revised its outlook for earnings in the third quarter to 50 cents a share, down from 56 cents, but still up 11% from the prior quarter.
“It is given that the third quarter is horrible,” said McBean. “I think people are going to pay less attention to what they see in the third quarter,” he said. Twelve companies out of 20 in the Billion Dollar Club are expected to report a sequential decline in their earnings, according to First Call. The average earnings per share for the quarter is expected to fall from 32 cents in the second quarter to 29 cents.
In the OC 50 index, 21 companies are expected to report lower earnings in the third quarter than they did in the second quarter. Four companies are expected to have flat results. Analyst estimates for five companies were not available.
Exceptions are rare. McBean found only five companies among the 70 in the two OC indexes that expect the third quarter to be better than their initial forecasts.
Still, surprises may occur. Last week, Western Digital said its quarterly loss would be less than what it had forecast in July. The company cited increased profit margins and previously had noted rising demand for its disk drives.
McBean said that while the third quarter is expected to be bad, the fourth quarter could see a turnaround with looser monetary policy, interest rate cuts and higher government spending. “Expectations are not that high for the fourth quarter, so there is a good chance that unless there is a disaster we might see a rebound in Q4,” he said. n
