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Five Things to Look for This Earnings Season

Earnings reports for the first calendar quarter will begin flooding in next week, with Motorola(NYSE: MOT) and Harley-Davidson(NYSE: HDI) scheduled for Tuesday, and Cree(Nasdaq: CREE), Redback Networks(Nasdaq: RBAK), and Yahoo!(Nasdaq: YHOO) reporting Wednesday, among others. For a comprehensive calendar of upcoming earnings reports, check out our Quotes & Data page.

Given the continuing market carnage, investors will certainly be looking (hoping?) for some relief. Just a couple of upside surprises, and then we're back in business! Well, we'll see. Until then, here are a few things for investors to keep in mind as we enter this earnings season.

Don't rely on Greenspan
Who will come to save the day? Alan Greenspan? He with the ability to leap tall interest rates in a single bound? The reality is that Greenspan's recent wave of interest rate cuts won't have an immediate impact on anything more than your home refinancing plans -- which might, in time, take consumer confidence up a notch or two. Historical consensus has the trickle-down benefits of lower borrowing costs taking 2-3 quarters to truly kick in. Even with cheaper money to be had, many companies are apprehensive about sticking their necks out right now.

The problem is that most companies can't wait that long for the antidote to chase away the venom. Layoffs have become contagious. Clearly the restructurings are more than just time-buying band-aids. When even Disney(NYSE: DIS) is giving its theme park employees "M-I-C, see you real soon" pink slips months before the critical summer season, it's clear that consumers and businesses will be holding back on major -- or even Minnie -- purchases for some time. With poor visibility, some companies may be bracing for the worst and just hoping that it will not become a self-fulfilling prophecy. Isn't it always darkest before the dawn? Look. Up in the sky! Is that Greenspan in a cape darting in from the horizon? -- Rick Aristotle Munarriz (TMF Edible)

Telecom: Not much relief in sight 
Don't expect the coming earnings season to smile upon any business that relies on telecom carriers having fat wallets. Suffering telcos such as AT&T(NYSE: T) and WorldCom(Nasdaq: WCOM) are crushed by debt. If you believe, as does Duquesne Capital Management's Ravi Suria, that it will take three to five years for these and other struggling companies such as Deutsche Telekom(NYSE: DT) and British Telecom(NYSE: BTY) to "deleverage" -- which is "improve their ratio of cash to debt" to the rest of us -- there's a long earnings winter ahead for any companies that sell to them.

This began to play out last year with the first warnings from telecom supplier Nortel(NYSE: NT) and continued pain from Lucent(NYSE: LU). Both of those companies provide traditional telecom equipment and optical networking gear. Their distress then spread to optical networking components makers Corning(NYSE: GLW) and JDS Uniphase(Nasdaq: JDSU), for whom Nortel and Lucent were 10% customers.

Just as networking equipment companies have been hurt by the woes of telecom carriers, communications chip companies have in turn suffered, since in many cases their biggest buyers are the networkers. Cisco's(Nasdaq: CSCO) rapid slowdown added to the woes of these companies, such as PMC-Sierra(Nasdaq: PMCS), Applied MicroCircuits (Nasdaq: AMCC), Conexant(Nasdaq: CNXT), and Broadcom(Nasdaq: BRCM). And according to a recent Gartner Dataquest study cited by Bloomberg, first-quarter sales of networking equipment showed little change over the previous year, after growing 30% in 2000, so there's little reason to expect much good news soon.

If not this quarter, when will things turn around for telecom carriers and their equipment suppliers? Who knows. But as long as the capital expenditures of the telecom carriers are hampered by large debt loads, related companies will suffer. -- Tom Jacobs (TMF Tom9) and Chris Rugaber (TMF Chris)

Software: Pent-up demand?
Beginning with Oracle(Nasdaq: ORCL) and continuing most recently with Rational Software(Nasdaq: RATL), enterprise software companies have been disappointing investors with an onslaught of earnings shortfalls. These companies are having problems closing deals because executives are increasingly uncomfortable forking over millions of dollars in difficult economic conditions. In some ways, that's good news, implying that deals haven't been lost to the competition, but simply delayed.

Overall, software companies that offer applications with a strong return on investment (ROI) proposition are best positioned for a rapid recovery. Usually, during tough times, businesses will seek out ways to cut costs and increase revenues. Mission critical applications -- such as supply chain management and customer relationship management software -- can deliver this through a rapid ROI.

This creates demand for enterprise software, which is less apparent as deals are delayed. While long-term demand for these software applications remains, investors in software companies may not see signs of it until the economy finally picks up again. -- Mike Trigg (TMF Tonto)

Not all earnings warnings are equal
These days, it seems that there are two types of companies -- those that have warned and those that will warn. Nevertheless, not all will warn for the same reason. You should be mindful of the difference between an unrealistic management and simple economic reality.

Unrealistic managements continually come out with big, brash earnings projections and then continually fail to achieve them. It is self-inflicted damage of the worst kind, and it is entirely avoidable. Yet, the tradition of overpromising and underdelivering still exists and has been disastrous for companies such as Lucent Technologies(NYSE: LU), and the temptation to do anything to meet those estimates has taken down former stars like MicroStrategy(Nasdaq: MSTR) in a blaze of ignominy. In the event of bad news, investors must take the time to temper their own expectations and emotions, and focus upon the long-term potential of their companies rather than a short-term swoon. Always keep in mind that not all earnings warnings are created equal: some are the result of broader economic problems, while others may indicate real trouble. -- Bill Mann (TMF Otter)

The Earnings "X" Factors
We think we've seen it all, but quarter after quarter companies that report disappointing results invariably come up with newer, better, and more creative explanations. Downbeat earnings have been blamed on everything from bunker stockpiling (Y2K mania) to political upheaval (the Florida election mess) to can't-miss television events (the demises of JFK Jr. and Princess Diana).

If it sounds like we're making crass jokes at the expense of people's lives and our nation's dignity, you'd be wrong -- in this instance, anyway. All of these and more have really and truly been named as culprits by companies looking for reasons to explain away poor performance. We tried these kinds of excuses in grade school with our homework and were rewarded for our cleverness with a yardstick on the bottom.

What are we looking for this quarter? Well, there was just a pretty big basketball tournament. That ended in April, too, so look for some carry-over into Q2. Amerigo Vespucci's birthday may have held up shopping on March 9.

Oh, and I was slightly hung over on Saturday, March 10, and stayed home all day. Didn't spend a buck. My apologies to the economy. -- David Marino-Nachison (TMF Braden)

To see each writer's stock holdings, click on their TMF names. The Motley Fool is investors writing for investors.


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