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Daniel R. DiMicco has been chief executive of Nucor (NUE
) for nearly two years. But it wasn't until mid-July that he was finally able to do something he hasn't done since shortly after taking charge of the steelmaker in September, 2000: Report a year-over-year increase in Nucor's net income. After six down quarters in a row, Nucor posted a 79% jump in second-quarter earnings, to $59.7 million, as steel production and prices climbed. "Congratulations on the great results," analyst John C. Tumazos of Prudential Securities told DiMicco.
Just as investors are losing faith in Corporate America, the nation's private sector may be emerging from its longest profit drought in more than 30 years. Based on results from 377 companies in the Standard & Poor's 500-stock index, second-quarter operating earnings are 1% higher than a year earlier, led by consumer-products companies and banks. Through July 26, moreover, the number of S&P 500 companies that topped analysts' forecasts outpaced the number that came up short in the second quarter by a wider-than-usual 5-to-1 rate.
And after a troubling two-quarter decline, sales for the S&P companies also are on the upswing, rising 3%. This suggests that businesses aren't lifting the bottom line only because of layoffs and other cost-cutting measures that, sooner or later, run out of steam.
WELCOME SIGN. A 1% increase in profits, of course, is hardly much to brag about. Indeed, some ominous developments are lurking that might erode earnings as the year winds down. Among them: The stock market's sickening summer slide, which is dragging down consumer confidence and threatening to throttle corporate investment. Still, the last time the S&P 500 managed to post a collective rise in year-over-year earnings was the third quarter of 2000, so any positive number is a welcome sign.
And if the increase in profits is modest now, higher numbers seem almost certain. Analysts polled by Thomson Financial/First Call foresee earnings rising 13.5% in the third quarter and 25% in the fourth quarter. One reason, of course, is that 2001's numbers were so puny it's relatively easy to record gains.
Economists, however, say more is going on than that. Unit labor costs, which sapped profits in '00 and '01 as employers outbid one another for workers in a tight labor market, have now leveled off. Meantime, productivity and real incomes are rising. The weaker dollar is also a plus because it lowers the price of U.S. goods abroad and swells take-home pay at multinationals as they repatriate income.
"Clearly, the sell-off in the equities market is not good for the economy," says Richard J. DeKaser, chief economist at National City Corp. in Cleveland. "But as for the earnings recession, that's over."
BACK INTO THE BLACK. Pulling up the S&P earnings in the second quarter were such titans as General Electric (GE
) and Citigroup (C
). Both topped the $4 billion mark in net income, with increases of 14% and 12%, respectively. Philip Morris (MO
) also reported a 14% bump in earnings, to $2.6 billion, while Microsoft's (MSFT
) income soared to $1.5 billion from just $65 million in 2001, when earnings were swamped by charges. General Motors' (GM
) net income nearly tripled to $1.3 billion.
Meantime, many other companies managed to swing back into the black. Ford Motor (F
) reported a $570 million profit vs. a $752 million loss in 2001's second quarter. Likewise, AOL Time Warner (AOL
) went to a $394 million gain from a $734 million loss, while International Paper (IP
) had net income of $215 million, compared to a $313 million loss. "We believe the first quarter will mark the bottom in earnings, and the second quarter is the first quarter of the recovery," says Richard S. Schneider, a paper and wood-products analyst at UBS Warburg. But he adds: "It's a slow recovery."
It's not only slow. The profit recovery is still skipping over entire segments of the economy. The telecom industry is a case in point. Crushed by a $13.1 billion write-off reflecting the reduced value of its cable TV assets, AT&T (T
)lost $12.7 billion in the second quarter. Lucent Technologies (LU
) was close behind. The telecom-equipment maker lost $7.9 billion, its ninth consecutive quarterly loss, as sales dropped 50%. And Motorola (MOT
), dragged down by more charges for firings and plant closings, lost $2.3 billion.
STUMBLING GIANTS. While still profitable, Big Pharma also slipped, hurt by new competition from generic drugs and delays in product launches. Bristol-Myers Squibb (BMY
) said its net plunged 65%, to $440 million, as sales fell 13%. Big Oil's performance also lagged, due to weaker demand and low natural-gas prices. Conoco's (COC
) profit plummeted 76%, to $130 million, while Unocal (UCL
) had earnings of $114 million, down 54%. Many tech giants also stumbled, with IBM's (IBM
) net income falling 79%, to $445 million, because of write-offs and an unprecedented slump in its services business.
What's more, many businesses warn that a full-fledged turnaround may not be imminent. Lucent, for one, doesn't see any chance of a profit for another year. Caterpillar (CAT
) also ratcheted down its outlook. Three months ago, the heavy-equipment manufacturer predicted full-year profits would rise as much as 7% on flat sales. Now, after reporting an unexpectedly steep 26% decline in second-quarter earnings, Caterpillar warns its 2002 income will be down 15%, with sales decreasing 4.5%.
"It's really a confidence issue out there right now as to when the economy is going to turn," says James W. Anderson, Caterpillar's investor relations director. "We think the underlying demand is there. There's just a confidence issue more than anything else."
JUICY BURGERS. On the whole, however, Corporate America has been posting its best numbers since the last months of the Clinton Administration. Take McDonald's (MCD
). Its second-quarter income advanced 13%, to $498 million. That marked its first increase since 2000's third quarter and ended the longest earnings slump in Big Mac's 47-year history.
And many companies, like McDonald's, are telling shareholders that the rest of 2002 will be even better. Shaken by accounting scandals and headline-grabbing bankruptcies, investors may not believe it yet. But corporate earnings are showing momentum that could make stocks worth buying again.
Arndt is a correspondent in BusinessWeek's Chicago bureau Edited by Beth Belton
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