Actual finance blog

European automakers have put on a brave face and fared better than their U.S. counterparts but a reality check looms as surging fuel and raw material prices put earning forecasts at risk.

Analysts say France’s PSA Peugeot Citroen (PEUP.PA: Quote, Profile, Research, Stock Buzz) and Renault (RENA.PA: Quote, Profile, Research, Stock Buzz) could miss their operating margin targets, forcing them to either trim targets or boost cost cutting, possibly as part of mid-year results due this month.

“It’s unrealistic to assume that Renault will achieve its original guidance,” said Pierre-Yves Quemener, head auto analyst at Landesbanki Kepler.

“The chances of “commitments miss” are growing week after week as cost inflation bites each time deeper and as the macro environment is depressing volumes.”

PSA and Renault, Europe’s No 2 and No 6 makers, have declined to comment ahead of their mid-year results.

Sergio Marchionne, CEO of Italy’s Fiat (FIA.MI: Quote, Profile, Research, Stock Buzz), which ranks fifth, has stood by his group targets.

“Despite what is happening, we are not only keeping our 2008 profit and cash flow forecasts, but we confirm those for 2009,” Marchionne told a conference this week.

But in a year when the price of oil is up 45 percent, some steel prices are up 50 percent and other raw materials such as aluminum have also surged, assumptions and forecasts are proving hard to hold on to. 

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Andrew D. Busch, a nonemployee member of Anheuser-Busch Cos Inc’s (BUD.N: Quote, Profile, Research, Stock Buzz) founding Busch family, said on Saturday that he supports the U.S. brewer’s efforts to remain “a strong company headquartered in St. Louis.”

Busch, an uncle of Chief Executive August A. Busch IV, said he supports his nephew, the board of directors and the management team of Anheuser-Busch as they evaluate and respond to the $46.3 billion takeover bid by Belgian-Brazilian brewer InBev NV (INTB.BR: Quote, Profile, Research, Stock Buzz).

“I believe that Anheuser-Busch has created substantial shareholder value over the long term and that it will continue to maintain the best interests of the shareholders and employees,” Busch said.

However Busch, who is not a company employee and has no role in decisions about the company’s future other than as a shareholder, stopped short of recommending that Anheuser should reject InBev’s $65-per-share bid.

Andrew Busch has “substantial” shareholdings in the maker of Budweiser and Michelob, according to a spokesman who declined to provide more details, including whether Busch supported rejecting the bid.

Busch added that he does not speak for other family members.

The statement comes a day after Anheuser’s board met face-to-face for the first time since receiving InBev’s unsolicited takeover bid. The company issued a statement late on Friday saying that no response had been made by the board and that it would continue to review and consider the proposal.

Anheuser-Busch has been family run for most of its history, which dates back to 1861, when Adolphus Busch married Lilly Anheuser and went to work at her father’s brewery. 

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Google Inc Chief Executive Eric Schmidt on Wednesday detailed his theory of competition in the Web industry while saying Google’s famous mantra of “Don’t be evil” is often misunderstood.

In an on-stage interview with writer Ken Auletta of the New Yorker magazine, Schmidt said “Don’t be evil” is meant to provoke internal debate over what constitutes ethical corporate behavior, rather than representing an absolute moral position.

“We don’t have an ‘Evilmeter’ we can sort of apply — you know — what is good and what is evil,” Schmidt said before an audience of media industry professionals at an event sponsored by Syracuse University’s Newhouse School in San Francisco.

On other fronts, Schmidt said Google was taking a patient view to making money from online video advertising, while it sees mobile phones attracting the most lucrative ad rates.

Google is moving to transform YouTube, its popular online video-sharing site, into a money-maker via new forms of advertising it will unveil over the next year, Schmidt said.

He was cautious about how profitable this might prove to be. For now, YouTube’s video traffic consumes the majority of Google’s outgoing network bandwidth. But he said it could possibly lead to the “creation of a whole new industry.”

“We don’t yet know how we are going to make significant amounts of money on YouTube,” Schmidt said. “But it seems obvious that we should be able to make some money from this.”

His optimism is based on two key facts: “We know people are watching it” and “We have the luxury of time to invest.” 

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Lowe’s Cos. reported a 17.9% drop in first-quarter earnings on Monday as the slumping U.S. housing market and softer economy hurt sales. Its shares fell almost 3% in premarket trading.

The nation’s second-biggest home improvement retailer said it earned $607 million, or 41 cents per share, in the three months ended May 2. That is down from $739 million, or 48 cents per share, in the first quarter of 2007.

Revenue slipped to $12.0 billion from $12.2 billion a year ago.

Analysts surveyed by Thomson Financial had been looking for net income of 40 cents a share on revenue of $12.4 billion. Estimates usually exclude one-time items.

Comparable-store sales — a closely watched gauge of retail health that measures sales at stores open at least a year — declined 8.4%. The company predicted that number would drop at least 6% in the current quarter and the year.

Lowe’s (LOW, Fortune 500) shares fell 73 cents, or 2.9%, to $24.16 in premarket trading.

"The challenging sales environment we have been experiencing for the past six quarters continued into the first quarter of 2008," said Chairman and Chief Executive Robert A. Niblock in a statement accompanying the report. "The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home."

The company expects second-quarter total sales to rise about 1% on earnings of about 54 cents to 59 cents a share. Analysts have forecast earnings of 56 cents per share. For the year, total sales are expected to increase about 1%.

Lowe’s and bigger rival Home Depot Inc., which is expected to post first-quarter numbers Tuesday morning, have seen profits slide over the past year as a slump in the housing industry continues.

But the sentiment on Wall Street has been positive recently, and many expect home improvement retailers to benefit from an eventual recovery in the housing market. Shares of Lowe’s have risen 10% so far this year. 

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Apparel retailer Gap Inc. said Thursday its same-store sales fell 6% in April, widely missing analyst expectations, hurt by weak results at Old Navy and international stores.

Analysts surveyed by Thomson Financial expected combined same-store sales to fall just 1.9%.

Same-store sales, or sales at stores open at least a year, is a key measure of retailer performance, because it measures growth at existing stores rather than from newly opened ones.

For the four-week period ended May 3, same-store sales were flat at namesake Gap (GPS, Fortune 500) stores and Banana Republic, down 12% at Old Navy and down 7% at international stores.

Analysts had predicted declines of just 4.5% and 2.7% at Old Navy and overseas, respectively, while expecting Banana Republic stores to post a 2.8% increase. Gap’s North America same-store sales were slightly better than Wall Street’s projection for a 1% decline.

Total sales rose 1% to $1.1 billion from $1.09 billion last year.

For the fiscal first quarter ended May 3, same-store sales fell 11%, while total sales fell 5% to $3.38 billion. Analysts expected higher sales of $3.45 billion.

Gap said though traffic patterns and sales continue to be challenging, it reaffirmed its earnings outlook for the year.

The company continues to expect earnings between $1.20 and $1.27 per share, while analysts polled by Thomson Financial, on average, expect a profit of $1.23 per share.

The San Francisco-based company said it expects first quarter net of 30 cents to 32 cents per share, including a $15 million tax benefit.

Analysts expect earnings of 27 cents per share. Analyst estimates usually exclude one-time items. 

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Reliance Bancshares Inc. of Frontenac said its first-quarter profit was down 55 percent to $310,000, or a penny a share. Revenue was up 36 percent, reflecting strong gains in interest and fee income.

Loans were up 9 percent to $81 million. The provision for loan losses nearly tripled to $1.1 million due to loan growth and adverse changes in risk ratings on some credits. However, net charge-offs fell slightly to $336,000. Assets were up 29 percent to $1.2 billion.

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An early Easter holiday, chilly weather and recession-wary consumers combined to deliver dreary March sales results for U.S. retailers.

On Thursday, retail chains including Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research), Limited Brands Inc (LTD.N: Quote, Profile, Research), and Pacific Sunwear of California Inc (PSUN.O: Quote, Profile, Research) reported monthly sales that came in below Wall Street expectations.

Wal-Mart reported a 0.7 percent rise in March sales at U.S. stores open at least a year, which was below Wall Street expectations for a gain of 0.9 percent.

But the world’s largest retailer raised its first-quarter earnings forecast, citing expense controls and fewer markdowns, sending its shares up 2 percent to $55.24 in pre-market trading.

The ability of U.S. consumers to keep spending is being limited by rising food costs, high gasoline prices, falling home values, a credit market crunch and a weakening job market.

The Labor Department said nonfarm employment fell by 80,000 jobs in March, marking the third straight month that U.S. employers cut payrolls.

With consumers worried that the economy either is in or teetering on the verge of recession, they are passing over purchases of nonessential items, like furniture or clothes, in favor of basics, like laundry detergent and pasta sauce.

Meanwhile, under other circumstances, Easter shopping could have boosted March sales results, spurring early consumer demand for spring merchandise and allowing retailers to sell items at full price. 

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Members of the Federal Reserve’s policy-setting committee worried at their most recent meeting that housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday show.

“Some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market,” minutes of the March 18 meeting said.

Fed economists presented a somber picture of short-term prospects — central bank staff now fully expect negative growth over the first six months of the year — but held out the possibility of a modest rebound later.

“The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half,” the report said, referring to gross domestic product, a broad measure of a country’s output of goods and services.

At the same time, Fed officials found recent inflation reports “disappointing,” noting also with concern that some indicators of inflation expectations were edging higher.

HARD TO SET POLICY

Policy-makers said there were limits to what could be done through interest rate cuts to deal with problems underlying the housing and financial market turmoil, but agreed trimming borrowing costs might provide some help.

However, Fed officials said it would be hard to calibrate policy responses because their aggressive rate cuts in recent months would take some time to show their effect on economic activity. 

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Economic growth was nearly flat in the last three months of 2007, according to a government report released Thursday.

The Commerce Department’s final reading on gross domestic product, the broadest measure of the nation’s economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter. The reading was unchanged from the preliminary fourth-quarter reading and in line with economists’ expectations.

In the third quarter, the economy grew at an annual rate of 4.9%.

Gregory Miller, chief economist at Sun Trust Banks, thinks the downward trend is likely to continue in the first quarter.

"We now have an economy that has geared down," Miller said.

"The data we’ve got so far suggest that the GDP number for next quarter is likely to be negative," he added.

Many economists, including Miller, believe that the economy entered a recession in the last month of 2007, when the initial GDP estimate of 0.6% was released.

Thursday’s report is the latest in a string of troubling reports that indicate economic weakness.

On Wednesday, the Commerce Department said orders to factories for big-ticket items fell sharply. And a report from the Census Bureau showed sales of new homes falling to their lowest level in 13 years.

Declines in the labor market have also contributed to the current softening in economic activity. However, a report released Thursday by the Labor Department found that new filings for unemployment benefits fell last week.

Overall, the anemic growth in the country’s GDP suggests that the economy is facing a prolonged period of contraction, Miller said.

"It’s going to be a while before we turn this around," he said. 

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38

Percentage of Americans who say they feel less secure about their financial situation compared to last year, according to the results of a Harris Poll

45

Percentage who believe the economy will get worse in the coming year
15

Percentage who believe the economy will improve in the coming year

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