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Profits: Now, That's More Like It


Is Corporate America getting its groove back? That question had analysts buzzing as first-quarter earnings began rolling in last month. Confounding warnings that uncertainties over the Iraq war, rising energy costs, and a bitterly cold winter that stunted retail sales would also crimp profits, the 900 companies on BusinessWeek's Corporate Scoreboard beat expectations. Profits climbed 33% from the first quarter last year, while revenues rose a better-than-expected 11% -- the first double-digit jump since the first quarter of 2001. Meanwhile, profit margins widened to 6.4%, up from 5.3% a year ago -- better than in any quarter since the third quarter of 2000.

After two years of heavy losses, some analysts believe that profits are finally headed in the right direction again. "When you see these results, you've got to say something positive is going on," says Charles L. Hill, research director at Thomson First Call. Economists say the combination of vigorous cost-cutting, low interest rates, and a weaker dollar are the best news for earnings since the economic contraction ended in September, 2001. Even some companies in the battered tech and telecom sectors are showing signs of life.

So is this a return to the go-go late '90s? Hardly. For one thing, earnings were so weak at this point last year that it would be hard to do worse. Companies took $14.8 billion worth of special charges in the first quarter of 2002, much of it reflecting goodwill write-offs. In the '03 quarter, write-offs came to about half that. The first quarter also got a boost from energy profits. Oil prices soared before the war and are now falling. Minus oil, earnings rose 22%.

Total Scoreboard profits -- calculated on the basis of income from continuing operations before extraordinary items -- were $118.2 billion, up from $89 billion last year. That's below the record $127.2 billion profits at the economy's peak, the first quarter of 2000. As recently as Apr. 1, the prospect of a prolonged war in Iraq had caused Wall Street analysts to slash consensus forecasts for all of 2003 by more than two percentage points, notes First Call. Its current estimate that earnings rose 13.1% in the quarter excludes some special charges included in BusinessWeek's calculation. "Business has had to absorb a lot of shocks in the last few years: the tech bubble, September 11, corporate governance scandals, Iraq," says Richard D. Rippe, chief economist at Prudential Securities (PRU) Inc.

The big economic indicators also remain worrisome. Sure, pricing power is returning for some companies, but for plenty of others, demand is still weak. Unemployment remains stubbornly high, at 6% in April, with 8.8 million people out of work. First-quarter gross domestic product grew at an annual rate of only 1.6%, so there is little evidence Corporate America is cranking up the assembly lines again. The Institute for Supply Management says that in April, U.S. output actually shrank for the second straight month.

Much of the rosy picture for the first quarter was the result of big gains at oil companies and carmakers, neither of which may have it quite so good again anytime soon. Profits at Big Oil rose 353% in the quarter, as prices climbed to near $40 a barrel ahead of the war in Iraq. Triple-digit profit hikes were common throughout the industry. Indeed, the most profitable Scoreboard company was Exxon Mobil (XOM) Corp., whose earnings rose 237%, to $7 billion. Yet with prices already falling, profits for the rest of the year will probably tumble.

Auto makers, whose profits surged 807%, also face an uncertain next few months. No. 2 Ford (F) Motor Co. reported results that were much better than expected: an $899 million quarterly profit, vs. an $80 million loss a year earlier. Ford credited cost-cutting and improved sales of higher-margin trucks. But it says second-quarter output will still be 16% below the second quarter of 2002. Meanwhile, General Motors (GM) Corp.'s earnings jumped 550%, to $1.5 billion. But much of that came from home-mortgage refinancings at its GMAC financing unit. The unsettling fact is that total U.S. auto sales fell 6.1% in April from the previous April.

The most pleasant surprise of the quarter was the tentative rebound of beleaguered tech and telecom. Verizon Communications (VZ), which lost $5 million in the first quarter of 2002, earned a $1.8 billion profit in the most recent quarter. That, despite 1% lower revenue. How? Plenty of cost-cutting and debt reduction, plus some help from new accounting rules. On the other hand, Texas Instruments (TXN) Inc. did manage to boost its top line, especially its sales of higher-margin chips. Revenues were up 20% as TI posted a $117 million profit, vs. a $38 million loss a year ago. "Semiconductor markets have improved significantly from the lows of 2001," says CEO Thomas J. Engibous. And at IBM (IBM) where profits grew 8%, to $1.4 billion, bullish CEO Samuel J. Palmisano said at the annual meeting: "We believe that, long-term, [the technology industry] will continue to grow faster than GDP."

Internet companies certainly did well. Profits at Yahoo! (YHOO) rose 346%, to $46.7 million, on surging ad revenue. At eBay (EBAY), profit soared 119% to $104.2 million.

Plenty of big names are still flying into the wind, however. American Airlines (AMR) Inc. parent AMR Corp. reported a truly dreadful first-quarter loss of $1.04 billion and just dodged bankruptcy. Boeing (BA) Co. lurched from a $578 million profit in the year-ago quarter to a $478 million loss as new plane deliveries fell. And industry bellwether General Electric (GE) Co. suffered badly at its Power Systems unit, selling only 33 new turbines in the first quarter, vs. 69 last year. Total GE earnings fell 9%, to $3.2 billion.

Yet many analysts believe that business profits should improve now that the war in Iraq is over and President George W. Bush is looking to stimulate the economy. "I believe we'll see a second-half surge," says Prudential's Rippe. If that happens, look soon for the fruits of the long-awaited economic rebound. By Brian Grow in Atlanta, with bureau reports


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