Europe's deepening economic crisis is cutting into corporate earnings, with the continent's woes threatening to exert a drag on multinational corporations around the world into next year.
This week, U.S. companies ranging from Ford Motor Co. F -0.99% to Apple Inc.AAPL -4.51% have blamed disappointing results on slowed spending by European consumers. Meanwhile European heavyweights including steelmaker ArcelorMittalMT +0.98% and pharmaceutical company GlaxoSmithKline GSK -1.22% PLC said they are suffering more than expected on their home turf.
In a sign of how bad companies think it could get, hard-hit Spanish communications company Telefónica SA TEF.MC -6.00% said Wednesday it is suspending dividend payments and share buybacks for the rest of the year, after reporting a 14% drop in quarterly profit.
"I don't see the light at the end of the tunnel," said Leif Östling, chief executive of Swedish truck maker Scania AB, SCV-A.SK -2.11% which reported a 40% decline in profit Friday.
The corporate alarm bells highlight how the miserable economic conditions in much of Europe are spilling onto the global stage. With much of Europe in recession and unemployment soaring, spending is sliding on everything from big-ticket items like cars to everyday staples like yogurt.
For all the attention devoted to China's growth, the 27 countries of the European Union are the largest economy of the world. Europe accounts for about one-fifth of all U.S. exports. Deutsche Bank's chief U.S. equity strategist, David Bianco, estimates 17% of profit and revenue of the Standard & Poor's 500-stock index companies comes from greater Europe.
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The downturn in Europe is weighing on China, for which Europe is a big market, and is threatening to retard an already slow-growing U.S. economy as well. About 60% of the 195 S&P 500 companies that have reported second-quarter results have missed revenue targets, according to Thomson Reuters. Revenue growth in the quarter inched up just 3.9%, and many companies have cited Europe as a factor
Profit figures for the S&P 500 were stronger, up 13.6% over a year earlier as companies coped by cutting costs. But downside surprises are growing; the number of profit warnings is four times that of upside surprises, Thomson Reuters said.
"The ongoing European crisis presents the biggest risk to our economy," Treasury Secretary Timothy Geithner said in congressional testimony Wednesday. "The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown."
Companies also are growing concerned about 2013 as government austerity measures eat into sales. The Ifo Institute survey of business sentiment released on Wednesday shows business confidence in Germany, Europe's largest economy, falling to its lowest level in over two years.
We are in a vicious circle," said BNP Paribas economist Dominique Barbet, arguing that government austerity is leading households to cut spending, which lowers tax receipts and leads to more austerity. "Everyone is afraid. Governments are afraid. Households are afraid. Companies are afraid."
After several rocky days, the Dow Jones Industrial Average Wednesday rose 58.73 points, or 0.5%, to 12676.05. Upbeat earnings reports from Boeing Co. BA +2.78% andCaterpillar Inc., CAT +1.44% both big exporters, lifted the average. Boeing raised its profit and sales forecast for the year after second-quarter profit rose 2.8% on growth in its commercial airplane business, and Caterpillar raised its outlook for the year after a 67% profit rise.
Asian markets edged higher in early trading Thursday, with Japan up 0.1% and Australia up 0.3%.
Many other companies are still projecting improvements in the second half of the year, and say that 2013 will be better yet. But those expectations are getting lower by the month. In January, for instance, analysts estimated that earnings of companies in the S&P 500 would rise 10% this year. Now, they project just 5% growth for the year, according to Thomson Reuters.
Honeywell HON +0.21% Chief Financial Officer Dave Anderson said in an interview most companies had been more optimistic about 2013 based on expectations of a stronger second half but are now questioning that outlook. "Here we are again in terms of revisiting our basic planning assumptions," he said. Honeywell's quarterly profit rose 11%.
Eaton Corp. ETN +2.59% CEO Alexander Cutler said he doesn't expect there to be any improvement in Europe or China this year and is pushing out the recovery for a number of his businesses into 2013. United Parcel Service Inc. UPS -0.09% CEO Scott Davissaid uncertainty in the U.S. economy leads him to think that forecasts for the second half of 2012 are too high.
"Economies around the world are showing signs of weakening and our customers are increasingly nervous," said Mr. Davis. UPS reported a 2.2% profit increase but cut its outlook for the year.
The crisis in Europe's auto sector has become critical for several companies. Ford on Wednesday said it suffered a 57% drop in earnings in the second quarter, largely on a $404 million loss in Europe. The U.S. auto maker lowered its 2012 profit forecast, citing overseas weakness. In Europe, PSA Peugeot UG.FR -3.90% Citroën SA, which is racing to stem a dangerous cash burn, said it swung to a loss of €819 million ($995 million) in the first half of 2012, from a year-ago profit of €806 million. "The market has profoundly changed," said Peugeot CEO Philippe Varin.
Other sectors are also hurting in Europe. Mobile phone operators have been delaying network upgrades, hitting earnings at Telefon AB L.M. Ericsson and Alcatel-LucentALU -2.83% SA. Alcatel last week warned that it expects an adjusted operating profit loss of roughly €40 million in the second quarter when it reports earnings Thursday. Ericsson said profit fell 64% in the quarter.
GlaxoSmithKline has been hit unexpectedly hard in Europe by government austerity measures, lowering expectations even since April. "We're not growing as fast as we hoped at the beginning of the year," CEO Andrew Witty said on Wednesday, when the company reported a 13% rise in profit.
Even companies that continue to do well are taking stock of the trouble in Europe and the broader economy. Caterpillar's director of investor relations, Mike DeWalt, said the company's customers are closely watching developments.
"People are taking a bit of a wait-and-see attitude as to how 2013 will shape up, and I think orders are reflecting that," he said.
Edited By Cen Fox Post Team
