News: Analysis & Commentary: CORPORATE PROFITS
IT DOESN'T GET A LOT BETTER THAN THIS
Southwood J. "Woody" Morcott had good reason to crow on Feb. 13 when he announced Dana Corp.'s 1994 results. Earnings for the year jumped 78%, to $228 million--Dana's biggest annual increase ever. Sales were up 21%, to $6.6 billion. Morcott, the company's chief executive officer, attributes the auto-parts company's hot performance to global expansion and rising productivity. What's more, Morcott is predicting that this year will be even better than last.
As it turns out, though, Dana's earnings--good as they are--weren't a whole lot above the norm. According to preliminary data compiled for BUSINESS WEEK'S quarterly scorecard of corporate earnings for 900 companies, profits (aftertax income from continuing operations before extraordinary items) were up an enormous 41% last year. That's the biggest jump since BUSINESS WEEK began compiling such data back in 1973--and it came on a sales increase of just 9%. Fourth-quarter earnings leaped 72%--the biggest rise since 1988's second quarter--on an 11% increase in sales. "This is the best profit environment by my reckoning in about 20 years," says Carmine J. Grigoli, chief portfolio strategist at Nomura Securities International Inc.
BIG BUMP. Why the stellar performance by Corporate America? Capacity utilization, at 85.5%, is at its highest level since 1979. That's largely because companies have chosen to eke out every gain they can from existing plants rather than invest in new ones. Detroit's Big Three auto makers, for instance, are using overtime to help juice output to the max. Another example is the steel industry. Buoyed by the strong economy, it operated at 93% of capacity last year.
Corporate restructurings also are continuing to give profits a major bump. Manufacturing productivity jumped 4.6% last year, while wages only rose 2.3%. IBM's turnaround alone added seven points to the BUSINESS WEEK 1994 profit number; the increase would decline to 34% if Big Blue were excluded from the list. DuPont Co. also is reaping the benefits of years of restructuring and sharp spikes in the price of basic chemicals. DuPont cut costs to the tune of $3 billion per year. In the fourth quarter, its profits nearly doubled, to $644 million, excluding extraordinary items, on sales that were up 9.6%, to $10.1 billion.
Another company where restructuring is starting to pay off big is Westinghouse Electric Corp. Heavy cost-cutting and a strong international focus helped propel the company's power-generation and refrigerated-transportation businesses to a dynamite fourth quarter. That helped boost the overall company's 1994 net to $77 million on revenue that was flat at $8.9 billion--vs. a $326 million loss last year. "We fundamentally changed how we do business," says Fredric G. Reynolds, Westinghouse's chief financial officer. "We're now competitive, and we're winning in the marketplace." Prospects for 1995 look good as well: As of January, Westinghouse had a mammoth order backlog of $10.4 billion, up 5% from a year earlier.
SOME LAGGARDS. Of course, not all companies are seeing profit hikes. For one, heightened competition cut profits at usually stellar Southwest Airlines Co. by 47% in the fourth quarter, to $20.3 million. And doubts are rising about some hitherto booming industries: For instance, analysts are fretting about steel profits because a $30-per-ton price hike on flat rolled steel instituted on Jan. 1 shows signs that it may not hold.
What's the prognosis for 1995? Market strategists expect profits to continue growing in the first quarter of the year and are optimistic for the full year. Grigoli expects earnings for companies in the Standard & Poor's 500-stock index to jump by 19% this year. That would be an excellent result--except by comparison with the colossal success of 1994.By Lori Bongiorno in New York, with Stephen Baker in Pittsburgh and Joseph Weber in Philadelphia