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Third Quarter Brings Profit Slump for German Companies

Now that all the results are in, it's clear that the third quarter brought a dramatic acceleration in the earnings downturn – contrary to most analysts' forecasts.


Frustrated. Third quarter earnings declined more than 70% on average.

Now that all the results are in, it's clear that the third quarter brought a dramatic acceleration in the decline in earnings seen by Germany's leading companies. The drop in income for companies included in the Dax-30 leading-share index had already averaged 32% in the first half of the year. But according to Handelsblatt calculations, the third quarter brought a decline of more than 70% on average.

The new economy was hit hardest. Whereas the fifty leading companies listed on the Neuer Markt for growth shares were still on average running at a profit in the third quarter of last year, they were incurring massive losses by the third quarter of the current year. These latest figures fly in the face of forecasts from many analysts who had expected the situation for most businesses to improve in the third and final quarters of this year. Most now say that slight improvements won't be seen until the start of 2002 at the earliest.

"We believe the downturn will bottom out in the fourth quarter," said Volker Borghoff, equity strategist at HSBC Trinkaus & Burkhardt. Although he forecast improvements in earnings from the start of next year, these will mostly be due to a base effect: as the decline in profits started in the first quarter of this year, it will not be difficult for companies to match year-ago levels or lift their earnings slightly from the year-ago period. At the same time analysts warned against exaggerated expectations.

"Profit forecasts for 2002 are still far too high," said Bernd Witt at BHF-Bank. This applies in particular to the Neuer Markt, he added, a view echoed by Christian Kehler, growth-share expert at DZ-Bank. "We are expecting a downward correction of around 15–20%," he said.

The main reasons behind the drop in earnings of German companies, which analysts said was in line with international trends, are the weak economy and the Sept. 11 terrorist attacks, which fuelled general uncertainty.Moreover, a number of special effects weighed on results. "Many companies have made provisions for the coming year and included as many earnings-burdening effects as possible in their current balance sheets," said Herbert Sturm, equity analyst at DZ-Bank.

Technology companies predictably lead the list of losers, both on the Neuer Markt's Nemax-50 and the Dax-30. Alongside Deutsche Telekom, Siemens' chip subsidiary Infineon slid deep into the red. Even software giant SAP, long regarded as crisis-proof, had to digest a 50% slump in profit. Among old economy stocks, it was mostly airline Deutsche Lufthansa and companies active in cyclical sectors such as chemicals giant Bayer or engineering group MAN which suffered the sharpest downturns.

The finance industry also saw its earnings tumble. Car maker Volkswagen, utility RWE and retailer Metro were the surprise gainers among Dax-30 groups. "These companies have responded a lot faster this time than to previous recessions," BHF-Bank's Witt commented. A small economic upturn would be enough to boost the profits of these groups, he added.