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Trimmed estimates, early earnings turn sentiment bearish

5:30 PM MDT | April 15, 2013 | —Rebecca Coons

Less Bullish: 2013 results off to a slow start.

The outlook for first-quarter results has dimmed as weaker-than-expected demand led several companies to issue warnings and industry analysts trimmed quarterly estimates.

“Anecdotally, January and February were muted, and the acceleration in March was weaker than normal,” says Jefferies analyst Laurence Alexander. “The much-anticipated surge in China after the New Year and the government transition failed to materialize, with order patterns cautious into the end of March.”

W.R. Grace cut its earnings outlook for 2013 and reported preliminary first-quarter earnings below analysts’ estimates as destocking and operational issues amid catalyst customers and weaker-than-expected economic conditions in Europe stifled demand. The company announced preliminary net income of $52–53 million for the quarter ended 31 March, down 13–14.6% from year-ago quarter. Preliminary adjusted earnings of 80–81 cts/share missed analysts’ consensus estimate of 88 cts/share, as reported by Thomson Reuters (New York).

“European economic conditions are weaker than expected, affecting the sales growth of all three business segments,” Grace says. The update also anticipates lower sales volumes in catalysts as the business transitions to higher refinery catalyst pricing. The company announced last month that it will raise base prices for fluid catalytic cracking catalysts by 10% and discontinue rare earth surcharges, although it did not provide a timeline for implementation.

Grace lowered its 2013 adjusted Ebit forecast from $560–580 million to $540–560 million. The updated forecast calls an increase of 4–8% compared with 2012. Adjusted Ebitda is now expected to be in the range of $665–685 million, down from a prior guidance of $685–705 million but 4.5–7.6% above 2012 results, the company says.

Other firms note recent weakness as well. Late last month, Ashland reported year-on-year (YOY) sales declines in specialty materials and weak performance materials margins. The company reports second-quarter earnings 24 April. Cabot says sales January and February sales lagged 8% YOY on weak tire demand, while Airgas warned it may miss the low end of its previous guidance for its fiscal fourth quarter, ended 31 March, given disappointing distribution segment sales.

Jefferies lowered estimates on Grace, Ashland, Cabot, and Airgas, and Alexander expects consensus estimates overall to be brought down about 5% over the course of earnings season. Companies that set targets based on expectations of quarter-on-quarter demand acceleration are likely to report lighter earnings.

“Key themes will likely include choppy order patterns, confirmation of customer resistance to price increases, anecdotes of cost savings being shared with customers, fewer levers to drive sales growth, and reduced [capital expenditure] budgets,” Alexander says. “We expect companies to continue to flex balance sheets given extremely low borrowing costs and to emphasize the appeal of M&A given modest organic growth prospects.”

Early reporters have done little to boost sentiment. A. Schulman fell of short of estimates, saying strength in the Americas and Asia could not offset weak conditions in Europe and Mideast ( p. 8). Schulman trimmed its full-year earnings guidance by about 2.8%, to $2.08–2.13/share, because of global economic softness.

Omnova’s adjusted earnings for the fiscal quarter ended 29 February fell 3 cts short of analysts 8 cts/share consensus estimates on lower paper chemicals volumes and weakness in Europe and India. Sales fell 9% YOY, to $251.7 million, driven by lower sales volumes and reduced pricing partially offset by favorable currency translation.

RPM was the outlier, reporting third-quarter net income up 30.8% YOY, to $8.7 million, on sales up 9.1%, to $843.7 million. Earnings totaled 7 cts/share, beating analysts’ consensus estimate of 6 cts/share. RPM’s fiscal third-quarter ended on 28 February. Consumer and many industrial segment results, together with accretive acquisitions, helped offset weakness in Europe, RPM says.

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