Economy

Time To Drop Earnings Estimates For 2011

Delta Airlines (NYSE: DAL) said that an increase in the cost it must pay for fuel could  hurt its earnings for the balance of the year. The International Air Transport Association, which constantly revises its profit forecasts for the industry due to everything from weather to volcanic activity, is likely to cut back its expectations. The price of oil will drive up the price of jet fuel. Airlines might as well warn on their first quarter 2011 earnings now. It is close to a repeat of their performances in 2008 when airline losses were caused by crude prices over $100.

There is strong evidence now that the airline industry is not alone. Concerns have begun to grow that fast food chains and restaurant companies cannot pass along the rising costs of agricultural commodities to their customers. McDonald’s (NYSE: MCD) could see its profits dented for the first time in over a year.

The problem will spread to large petrochemical corporations. Dow Chemical (NYSE DOW) and its peers will face compressed margins.

The inflation problem will hurt  industries from car manufacturers to home builders to retailers which sell cotton clothing.

There are very few large publicly traded companies which have made it clear that their earnings prospects could be hurt as badly by commodity price inflation as they were by the recession. The period when large companies could cut costs is over. They have already fired and squeezed out what they can, forcing them to absorb the economic hand they have been dealt.

Companies may not readily admit to the problem, but perhaps securities analysts will. They would do the investors who follow their recommendations a great service. Inflation is here and its effect for the next year are already likely to be awful.

Douglas A. McIntyre