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The Best Gains In 31 Years


Corporate profits came roaring back in 2003. The economy, hesitant and unsure of itself in the first half, ultimately gained the self-confidence it needed to get moving and shifted into high gear. The result was dazzling: Profits for the 900 companies on BusinessWeek's Corporate Scoreboard rose 76% from the year before, with fourth-quarter earnings up by 322%. True, those figures were skewed by Time Warner Inc. (TWX), which single-handedly depressed the year-earlier results with its massive $44.9 billion loss in the final quarter of 2002. But even after factoring out the media giant's recovery, profits -- thanks especially to finance, oil, and technology companies -- soared 69% in the final quarter of 2003 and 50% for the entire year.

Those are the largest quarterly and annual profit gains since BusinessWeek first started tallying Scoreboard results in 1973. The Scoreboard numbers represent company-reported income from continuing operations before extraordinary items, as defined by generally accepted accounting principles (GAAP). The profit increases reported by Thomson First Call have been lower: 25% for the fourth quarter and 17% for 2003. Those earnings numbers are based on analysts' estimates and exclude certain unusual items.

As the economy bounced back, CEOs gained confidence that the long-awaited upturn was for real. They boosted spending on capital goods. The weaker dollar meant higher revenues for many multinationals. The government stoked consumer spending by cutting taxes while the Fed maintained low interest rates. And that encouraged homeowners to keep refinancing, putting more dollars in their pockets. All that helps explain why corporate sales expanded by 9%. Only six of the 60 Scoreboard industry groups had lower sales during the year, compared with 19 in 2002.

Yet the biggest force behind the year's hefty profit rise was undeniably Corporate America's ability to squeeze out more earnings from those additional sales. Morgan Stanley (MWD) Chief Economist Richard Berner marvels at how American businesses tightened their belts and became more efficient during the downturn. Preliminary government figures peg nonfarm productivity gains throughout 2003 at a remarkable 5.3%, the highest annual gain since 1965. Rising productivity held down job growth, of course. But it paid off in higher earnings, because far more revenue flowed to the bottom line as the economy recovered. "That was the key factor in driving profit margins higher and earnings growth way past expectations," says Berner. Indeed, overall profit margins for Scoreboard companies were 6.7% in the final quarter of 2003, vs. a piddling 1.8% the year before.

As usual, though, not all sectors were invited to the profit party. Although 47 of the 60 industry groups did better in 2003 than in 2002, there were laggards. Prime among them were airlines, regional phone companies, and drugmakers. Despite cutting costs, many of the biggest companies in those industries suffered from brutal competition that suppressed profit growth -- or wiped out profits altogether. One silver lining: Some of these also-rans managed to cut their losses. Lucent Technologies Inc. (LU) narrowed its 2003 loss to $168 million, from $11.7 billion the prior year, while AMR Corp. (AMR), parent of American Airlines Inc. (AMR), halved its loss to $1.2 billion.

BIG RESURGENCE. No industry added more to Scoreboard profits in absolute terms than Big Oil. The group's earnings more than doubled, to $45.2 billion. The war in Iraq, low supplies, and continued uncertainty over the Middle East sent oil and gas prices higher over the year. With OPEC planning to cut production, they are unlikely to retreat. Exxon Mobil Corp. (XOM) accounted for the bulk of the industry's gain and ranked No. 1 in total profits: Earnings rose 90%, to $21.5 billion, on a 22% increase in sales, to $222.9 billion. Only Wal-Mart Stores Inc. (WMT) had larger sales -- $255.1 billion, up 11%.

The big resurgence in capital spending lifted tech companies sharply, as corporations began investing again in information technology. Earnings for the computer industry soared 210%. Apple Computer Inc. (AAPL) recorded the largest increase for the group, a 552% jump in annual profits to $137 million, thanks to strong sales of its computers and the iPod. IBM's (IBM) yearly profit increased 43%, to $7.6 billion, on the strength of consulting services and software sales. And hardware sales accelerated sharply in the fourth quarter. IBM Chief Financial Officer John. R. Joyce recently told investors that "2004 is the year when the IT industry will begin its next growth cycle."

Chipmakers are already seeing the cycle's impact in the explosive growth of new digital products, such as next-generation cell phones and game consoles. The semiconductor industry posted a $4.8 billion profit in 2003, vs. a $4.2 billion loss the year earlier, with a lot of help from industry leader Intel Corp. (INTC) Its profit soared 81%, to $5.6 billion, on a 13% rise in sales.

By comparison, the crowded software industry didn't see such a sharp increase. Although profits at Oracle Corp. (ORCL) rose 22%, to $2.5 billion last year, sales climbed a meager 4% -- one reason the database and enterprise software maker is angling to buy its nearest competitor, PeopleSoft Inc. (PSFT). Even behemoth Microsoft Corp. (MSFT) barely surpassed the industry's 8% total annual sales gain, with an 11% increase, to $34.3 billion. Profits rose just 9%, to $8.9 billion, because sales of PCs, where most of the company's software is placed, were sluggish until the fourth quarter.

SEEING DAYLIGHT. Even the battered telecom industry is seeing daylight. While sales shrank at many service providers, there was better news in the wireless market and among equipment makers. Sales at Cisco Systems Inc. (CSCO), the giant network-equipment maker, rose 5% in the fourth quarter, and profits leaped 76%, to $1.1. billion. Although still cautious, Cisco is counting on the increasing ability of its big telecom customers to spend more.

More capital spending buoyed Old Economy companies, too. Machinery makers such as Caterpillar Inc. (CAT) saw a nice bump in exports, and 2003 profits rose 38%, to $1.1 billion. Factory-equipment maker Parker Hannifin Corp. (PH) recorded a 51% increase in 2003 profits, to $210 million, and continued the momentum with a 19% rise in U.S. industrial orders for January. "It's nice to come out of the chute with these numbers," says Chief Operating Officer Nickolas W. Vande Steeg.

The stock market reflected this improvement, with the Standard & Poor's 500-stock index climbing 26% last year. Combined with a healthy bond market, that helped power profits at the big securities firms. Merrill Lynch & Co. (MER), which slashed costs and beefed up its nonbrokerage businesses, caught the biggest updraft: Its 2003 profits rose 59%, to $4 billion. The company has successfully pursued a strategy to diversify by boosting debt underwriting, foreign-exchange trading, and other areas that aren't reliant on its commission-based brokerage business. Diversified financial services giant Citigroup (C) also captured gains in the securities markets as well as from its strong consumer-lending business. Profits rose 33%, to $17.9 billion. That made it the second most profitable company on this year's list after Exxon Mobil.

Commercial banks -- up against strong comparisons with 2002, when they shone because of the refi boom -- posted a more modest 12% profit rise in 2003. Earnings at bellwether mortgage lender Washington Mutual Inc. (WM), in fact, were flat for the year. Now the betting is that if interest rates rise, banks may be hard-pressed to match 2003's gains in the coming year.

Indeed, the across-the-board 50% annual profit increase for the Scoreboard companies will be a tough act to follow in 2004. Oil prices may fall. Interest rates could rise. And economists say that the uptick in capital spending will begin to dampen earnings as depreciation costs climb. But as most companies would attest, after the last few years, that's a welcome problem to have. By Robert Berner with Michael Arndt in Chicago, and bureau reports


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