Europe’s Weak Economy Bruises Apple’s Earnings
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The Fiscal Times
July 25, 2012

There’s no place to hide. When even Apple (AAPL) – which for years delivered better-than-expected earnings quarter after quarter – disappoints investors, it’s clear that the European sovereign debt crisis and the sluggish pace of growth at home are taking a hefty toll on corporate profits.

Apple’s misstep was perhaps the most dramatic, as it announced earnings of only $9.32 a share, well below the consensus of $10.36, but it wasn’t the only one. UPS (UPS) also announced earnings that fell short of analysts’ predictions, as did Whirlpool (WHR). And while Netflix (NFLX) announced earnings that came in ahead of expectations, they were still 91 percent below year-earlier levels, and the company cautioned that it will be “back into the red” as it ventures into new geographic markets later in the year.

In Apple’s case, the slowdown is significant. Last year, in the quarter ending June 30, the company’s revenue grew 59 percent and its earnings soared 94 percent. This year, these growth rates fell to 23 percent and 21 percent – an astonishing decline, caused in part by consumers’ expectations that the iPhone 5 and a new mini iPad will be released later this year.

At least in Apple’s case, however large the disappointment, investors can hope that those new products will provide a spark after what even die-hard Apple fans must acknowledge was an ugly quarter. (In particular, investors must hope that the new iPhone will help Apple fight off competition from rival Samsung. The iPhone’s sales, selling price and share of Apple’s total revenues all fell during the quarter.) Certainly, it seems as if all the analysts who only a few months ago were predicting Apple’s stock was destined to skyrocket to $700 may have to temper their expectations for now; in after-hours trading, the shares had fallen 5.5 percent to $567.80.

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In all these earnings reports, it’s not just what happened, but what management expects to happen next that will shape investor reactions. Moreover, the gloomier the news from Europe, the harder it will be to coax a positive response to mediocre results, much less ward off the impact of an outright disappointment. And there have been more than a few negative forecasts this week alone. Texas Instruments (TXN) warned that its customers are becoming more cautious and that its third-quarter revenues won’t live up to analysts’ expectations. Whirlpool was directly affected by a slump in sales in Europe, where economic woes are slowly but steadily affecting not only the nations on the “periphery,” whose debt woes ignited the crisis, but also Germany and the Netherlands, which earlier this week were hit by warnings of a possible debt downgrade by Moody’s Investor Service. AT&T (T) trimmed its own forecast for its business services division, another casualty of the economic uncertainty.

The European shadow may only lengthen, as there are few encouraging signs that policymakers are close to bringing the crisis under control. Any hopes that a bailout of Spain’s banking system would be what was needed to revive confidence now seem doomed to disappointment. The “Spanic” (the latest bon mot from the European crisis, for “Spanish Panic”) took a new twist this month as debt-strapped regional states like Catalonia and Valencia will be looking to Madrid to help them meet their own budget shortfalls and refinance their debt. But what about Madrid itself? Concerns that the central government won’t be able to cope with helping the regional governments while coordinating a banking bailout helped drive yields on Spanish 10-year bonds to a record of 7.64 percent yesterday.

German and Spanish finance ministers met in Berlin Tuesday evening and issued a statement that those sky-high interest rates – perilously close to the yields on Greek, Irish and Portuguese debt in the weeks before those governments had to seek full bailouts – don’t reflect the underlying strength of the country’s economy. But it will take more than fair words to stop the storm underway in the financial markets. As policymakers appear to dither, a new generation of bond-market vigilantes appears intent on forcing some kind of showdown. And odds are that corporate profits will continue to show up as collateral damage.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.