| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| CORPORATE SCOREBOARD
Bumping against the Profit Ceiling Profit growth is slowing as companies feel the squeeze of rising wages and flat prices It had all the makings of a classic Houdini-like escape. As early fourth-quarter reports trickled in from bellwethers like AT&T Corp. (T) and Microsoft Corp. (MSFT), U.S. corporate profits looked like they would dodge Wall Street's dire expectations. Strong Christmas sales showed that consumers were still feeling frisky, which helped melt fears that calamity was washing ashore from Asia and Latin America. Alas, the final profit numbers are in for 1998, and they tell a more sobering tale. Dragged down by bad news from Big Oil, steelmakers, and heavy-equipment companies, net income from continuing operations before extraordinary items fell 3% in the fourth quarter for the 900 companies on BUSINESS WEEK's Corporate Scoreboard. It was a fitting finish to a weak year. The Scoreboard companies barely eked out a 2% earnings gain for all of 1998, recording their slowest growth since 1991. Clearly, much of the problem reflects the popularity of special charges for mergers, restructurings, and other transactions. On an operating basis, results look a lot better. So far, operating earnings for the 430 companies in the Standard & Poor's 500-stock index that have already reported are up 3.9% for the fourth quarter, and 3.5% for last year, according to First Call Corp. Still, it's clear that Corporate America's profit express has hit the brakes. And a consensus of economists expects zero growth in net income in the coming year. Concludes David H. Resler of Nomura Securities International Inc.: ''Generating strong profit growth is tough to do these days.'' That's hard to figure when the U.S. economy overall is booming. Growth of real gross domestic product jumped to a 5.6% annual rate in the fourth quarter and hit 4.1% for all of 1998, the third straight year that growth was near 4%. Bolstering the economy was strong consumer spending, up 4.8% for the year. Corporations added their own fuel with a boom in capital spending, up 11.9% last year, as companies aggressively upgraded their computer systems. HANGING TOUGH. So what's the problem with profits? Many companies are caught in a classic squeeze between rising pay and stagnant prices. The roaring economy has produced tight labor markets--and climbing wages. Even with productivity rising during the fourth quarter at the healthiest rate in nearly three years, unit labor costs last year rose 2%. Yet businesses on average could raise their prices only 0.7%, as they were restrained by cheap imports and stubborn customers. The biggest winners in 1998 found ways to boost sales of high-margin products. The top individual profit generator was Ford Motor Co. (F), with net income of $22.1 billion, up 219%. About $16 billion of that came from the spin-off of its Associates First Capital financing unit. Still, Ford's operating income was up 10%, making it the world's most profitable carmaker, thanks largely to sales of ultraprofitable sport-utility vehicles. General Electric Corp. (GE) was runner-up in the profits sweepstakes, with $9.3 billion in net income, up 13%, due in part to surging demand for locomotives from railroads trying to untangle system snarls. Software firms rode the growth of the Internet and a flowering of E-commerce. A healthy chunk of the industry's advance came from Microsoft's remarkable 63% profit gain, to $6.4 billion. Even more impressive: Microsoft lifted its net profit margins over 40% in the fourth quarter, from 32% a year earlier. Strong demand for Windows 98 operating systems and software for Net servers drove Microsoft's sales up 27%. But elsewhere in techland, the Asia crisis and a glut of U.S. PC inventories combined to deflate profits for makers of chips and computers. Prices fell across the board for the first half of the year, then stabilized, allowing chip giant Intel Corp. (INTC) to post a record final quarter. However, that couldn't stave off Intel's first annual profit decline in a decade, a 13% drop to $6.1 billion. ENERGY WOES. Still, that was better than the results at Compaq Computer Corp. (CPQ), which recorded the single biggest loss for the year--$2.7 billion--after it took a huge $3.2 billion write-off for research and development on its acquisition of Digital Equipment Corp. Other profit disasters bubbled up in the oil patch, where inflation-adjusted crude-oil prices were at their lowest point in 12 years. Earnings in the coal, oil, and gas group plummeted 56% last year, while the petroleum services sector recorded a 47% drop. At Exxon Corp. (XON), the largest oil company, profits tumbled 24%, to $6.4 billion. Basket-case economies in Asia and Latin America continued to take a toll on heavy industry. Last year, Caterpillar Inc. (CAT) saw its net income slide 9%, to $1.5 billion, as foreign orders evaporated for its construction equipment. Meanwhile, cheap foreign imports helped knock steel sales down 25% at the leading domestic producer, USX (X)-U.S. Steel Group, where profits fell 19%, to $364 million. Financial-services companies took some of the biggest hits overseas. Merrill Lynch & Co. (MER) got stomped by the collapse of worldwide bond markets after Russia's debt default in August. That dragged down Merrill's yearly earnings by 35%, to $1.3 billion. But profits soared 29%, to $348.5 million, at Charles Schwab Corp. (SCH). The difference? The discount broker does no international banking or bond trading, but came up big with its bet on Internet stock trading. Says Michael A. Flanagan, head of researcher Financial Service Analytics Inc.: ''In 1998, the best thing on Wall Street was to stay home.'' What are the odds that foreign bogeymen will make more mischief for Corporate America in 1999? The conventional wisdom is that the worst is over. ''Things are pointing up in Korea, Thailand, and much of Asia,'' says Hugh A. Johnson, economist with First Albany Corp. ''That's encouraging for the U.S.'' On the other hand, it looks like domestic growth might now be slowing. In December, economists surveyed by BUSINESS WEEK expected GDP growth to slow to about 2% in 1999. No wonder few economists are forecasting a quick return to double-digit earnings growth. By Larry Light with Kathleen Madigan in New York, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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