Stocks are in full retreat mode again. Since the Federal Reserve announced
Operation Twist, the Dow has dropped by more than 600 points. Hardly a ringing
endorsement of current policy, investors are firmly convinced that the economy
spiraling downward. Thursdays earnings report from FedEx (NYSE: FDX ) is not
helping matters. The overnight shipping company beat analyst estimates for the
quarter by a penny per share but reduced guidance for the full year. Confirming
suspicions of a slower economy, FedEx now expects full-year profits to range
from $6.25 to $6.75 per share. The previous estimate for the year was $6.35 to
$6.85 per share. That slight reduction was all it took for the bears to pounce.
FedEx shares fell 10% during the trading day after the news was released. But
are there other stocks in the market set up for a similar profit reduction and
subsequent declines in stock value? I would think so. FedEx is a leading
indicator. To the extent shipping slows, profits for a broad spectrum of
companies could be at risk. It would be prudent but painful in the short term
for management to lower profit forecasts. Here are three companies that could
get hit hard by weaker outlooks: DuPont Not only is the economy slowing, but oil
prices have held relatively firm during this recent bout of selling in the
market. Oil is a key ingredient in many of the products made by DuPont (NYSE: DD
). Without the ability to pass along higher prices to consumers, profit margins
are likely to shrink. In the most recent quarter, DuPont beat analyst
expectations. That performance might lull investors to sleep for the coming
reduction in profit forecast. Wall Street has increased the average estimate for
the current quarter and fiscal year during the past 90 days. For the full year,
the average Wall Street estimate is for DuPont to make $3.99 per share. If
DuPont reduces guidance, that average estimate could drop by 5% or more. A
single-digit multiple of earnings would be appropriate. At nine times the
current estimate, the price of DuPont would be $35 per share. With the stock
trading for $41.27 per share, there is plenty of downside risk on DuPont.
Lockheed Martin The budget battle is in full gear. Headlines about spending cuts
only going to increase as the November super-committee deadline draws near. At
risk are defense spending dollars that flow directly to some of the largest
stocks in the market. Lockheed Martin (NYSE: LMT ) is front and center for the
battle. While the company is ramping up lobbying efforts to defend spending, the
reality of the economy and budget deficit suggest those efforts will fail. It is
reasonable to assume that the higher likelihood of budget cuts will result in
Lockheed ratcheting down profit expectations. As it stands, the average Wall
Street estimate for the current year is $7.51 per share. With the company having
made $7.34 per share in 2010, growth for the year is an anemic 2%. Shares trade
for 10 times current estimates. Any reduction in earnings is likely to be
greeted by a significant selloff in share price. Norfolk Southern After the
FedEx report, alarm bells should be ringing for any stock related to
transportation. Fewer goods and services shipped mean lower profits across the
board in the sector. Ripe for a reduction in profit guidance, then, is train
company Norfolk Southern (NYSE: NSC ). So far, losses have been modest thanks to
current operating performance that has exceeded Wall Street forecasts. If we are
indeed at a tipping point, investors might not be able to rely on such stellar
results in the future. For the current year, the average Wall Street estimate is
$5.14 per share. Last year, Norfolk Southern made a profit of $4 per share. The
current estimate for 2011 represents a 28% improvement in profits. The challenge
will be in 2012. For now, the 2012 Wall Street profit estimate is for the
company to make $5.85 per share or 14% higher than 2011 expectations. With
shares trading for 12 times current-year estimates, shares are appropriately
priced. A reduction in 2011 numbers likely will push the 2012 estimates lower,
too. Should expectations slip to single-digit profit growth, look for shares to
sell off accordingly.
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