(From THE WALL STREET JOURNAL) By John Shipman and Bob Tita
The March 11 earthquake and tsunami in Japan pose new strains on U.S. corporate earnings growth, already slowed by rising food, oil, steel and other costs, and threaten to curb the sales expansion in red-hot industries including autos, rail and technology.
Because of its timing just weeks before the first quarter ended Thursday, the disaster will have a modest impact on what are expected to be another string of solid earnings gains. Japan's troubles will shave about 25 cents off first quarter S&P 500-Index profits, now projected to $24.10. But the impact grows, according to Bank of America Corp. projections, doubling its impact on projected second quarter earnings.
Japan isn't a big source of sales or profits for most U.S. firms. Analysts say the S&P 500-Index members derive about 8% of annual revenue from the island nation. It's a "front-end ding, not a crash landing," for corporate earnings, says RBC Capital Markets equity strategist Myles Zyblock.
The ripple effect on the U.S. economy is still broad: Chip makers can expect higher costs for silicon wafers. Railroads will ferry less coal to West Coast ports, and return with fewer Japanese autos destined for car dealers. First quarter operating margins are projected to slip to 8.6%, the second consecutive quarterly decline.
Consumers will feel the impact, too. Higher chip prices should push up manufacturers' costs for cellphones and home electronics. A shortage of certain made-in-Japan autos and parts, is already pushing up the prices of used cars and may delay or preclude some repairs.
Some businesses, including airlines, auto makers, insurance firms, and railroads, will incur the brunt of the impact. CSX Corp., Union Pacific Corp. and Norfolk Southern Corp. garner between 5% and 8% of their revenue from their mostly-domestic auto-related shipments. But the rails also carry coal steel to West Coast ports for export and carry Japanese-made cars destined for U.S. dealers.
Delta Air Lines Inc. the largest U.S. airline in Japan, estimates its temporary pullback on daily flights to Tokyo's Haneda Airport will slice between $250 million and $400 million from this year's earnings. It didn't provide estimates by quarter. The Atlanta-based carrier generates about $2 billion annually, or 8% of its total revenue, from its Japanese operation.
American International Group Inc., the struggling insurer, recently estimated a $700 million loss from its Japanese operations.
Chip maker Texas Instruments Inc. said its first-quarter results will be hurt by costs for shifting work from a plant in Miho, Japan, to other sites. The plant sustained substantial damage and probably won't resume full production until the middle of July, it said. The plant accounted for about 10% of the company's 2010 revenue.
A pull back in Japanese consumer spending also will hurt U.S. companies' sales. Jeweler Tiffany & Co. already trimmed its first-quarter earnings target by five cents a share, to 57 cents, citing the effect on its store operations there. Japanese customers make up about 18% of Tiffany's revenue and roughly 25% of its profits.
Companies that would expect to benefit from less competition from Japanese rivals are grappling with related problems. U.S. auto and construction equipment makers including General Motors Co. and Chrysler Group LLC have cut production on certain models because of shortages of components from Japan. Ford Motor Co. has restricted the colors available on some models and Deere & Co. has warned its sales of excavators may be hurt by component shortages.
U.S. operations of auto makers' Honda Motor Co. and Subaru also have slowed production. On Thursday, Toyota said it would increase U.S. prices by 2.2% beginning in May on most of its vehicles.
Of course, there are some companies and industries that will benefit. Rental company Hertz Global Holdings Inc. said its first quarter profits will benefit from higher resale values on its Japanese car inventory.
Rebuilding efforts later thsis year may also help U.S. construction and materials firms.
"Rebuilding will require steel, and coal if there is some push-back against nuclear power," said Morningstar Inc. analyst Adam Fleck.
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