Down at the bottom line, things are looking up for Corporate America. But even with a soaring stock market, encouraging profits, and an apparent return of consumer confidence, you won't find executives exulting just yet. A lot of them made that mistake in the euphoria that followed the gulf war, only to watch the country fall deeper into recession. This time, says Stephen S. Roach, senior economist at Morgan Stanley & Co., "we're exercising caution."
But there are plenty of signs that the economy is preparing to emerge from its torpor, albeit slowly. First-quarter retail sales were up 12% from last year's fourth quarter. Gross domestic product grew at a 2% annual rate in the first quarter, compared with 0.4% in 1991's final period. And first-quarter profits before extraordinary items for the nearly 900 companies on BUSINESS WEEK's Scoreboard were 7% higher than a year ago. It all adds up to "a moderate economic recovery in 1992 but not a dramatic expansion in earnings," says Thomas Doerflinger, a PaineWebber Inc. investment strategist.
BANKING REBOUND. That moderate recovery wasn't limited to just a few industries. In the first quarter, three times more sectors reported dollar gains in profitability than reported dollar losses. Notable gainers: the automotive, telephone, and financial-services industries, and Eastern banks. Among the biggest losers were the fuel, retailing, and chemical industries.
The banking industry checked in with some tremendous turnarounds, though as a whole it gained only 8% over 1991's first quarter. Profits soared at many of the nation's bigger banks, notably Citicorp, Bankers Trust, and the ever-acquisitive Banc One. They were helped by lower short-term interest rates and declining problem assets. Although banks in the West and Southwest stayed sluggish because of California's bleak economy and worsening real estate problems, their peers in the South and Southeast recorded a 48% gain.
Other industries with dramatic earnings turnarounds were appliances/home furnishings and forest products. Both got a boost from the resurgent building industry. Forest products also benefited from what one analyst calls "the spotted owl effect"--rising prices stemming from environmental restrictions on supply. The publishing and broadcasting industries got some help from a long-awaited increase in ad revenues.
The Big Three carmakers can thank their nonauto operations and strenuous cost-cutting moves for some badly needed profits after a string of losing quarters. General Motors Corp. reported earnings of $179.3 million after six quarterly losses totaling nearly $8 billion. Likewise, Ford Motor Co. drove home with $337.9 million, its first profit since the third quarter of 1990. Chrysler Corp. was the only loser in the bunch, partly because of startup costs for its Jeep Grand Cherokee. Still, excluding accounting charges, its $231 million first-period loss was $110 million better than first-quarter 1991.
For many fuel companies, the gulf war was a boon, as skyrocketing oil prices sent profits out of sight. But now it's payback time: Eliminate the oil group's 57% earnings plunge from the Corporate Scoreboard, and the first quarter's increase in profits would have been 19% instead of 7%. Exxon Corp. made $1.3 billion, down from $2.2 billion last year. Analysts blame weak worldwide demand for gasoline and petroleum products. Texaco had a 52% decline, Occidental Petroleum posted a 76% drop, and Mobil fell a painful 82%.
If refiners think it has been hard selling gasoline, they should imagine trying to pry open shoppers' wallets for fashion, toys, and other nonessentials. Retailers' profits plunged 53% from a year ago as many department stores and specialty chains slid into the red. Four of the 15 biggest dollar losers were from this group, including Federated Department Stores and R. H. Macy & Co., suggesting that rising consumer confidence had yet to translate into bigger spending.
BARGAIN HUNTING. That left the door wide open for discounters such as Kmart Corp. and Wal-Mart Stores Inc., which earned $479 million and $602 million, respectively. "The motivating issue from now on will be price, not fashion and prestige," says Alan Millstein, a New York consultant, who expects further profit declines at pricey department-store chains in the months ahead.
Low prices haven't worked out so well for the airlines. Many carriers tried to lure travelers with cheap seats, but the latest price war pummeled profits--and didn't even draw many fliers. Delta Air Lines Inc. had the biggest loss, $151.6 million, thanks in part to the costs it incurred absorbing Pan Am Corp.'s transatlantic routes last year. Someanalysts, however, expect airlines to take off in the next three quarters with more consolidation among the top players and a recovery in demand. The turnaround may stall in the second quarter because of costs associated with consolidation, "but there will be a biggerpayoff in the long term as the survivors get a bigger piece of the pie," says Glenn Engel, vice-president at Goldman, Sachs & Co.
The twists and turns of the economy had a considerable impact on the rankings of America's most profitable companies. Mobil, Dow Chemical, and Chevron disappeared from the first quarter's most-profitable list, to be replaced by Kmart, Boeing, and Eli Lilly. Big Blue finally had a bit of good news, too. After tumbling from the top 25 earners' list for 1991, IBM hopped back into the top 15, with net earnings of $595 million, a 7% increase from last year's first quarter. Key factors: strong cost-cuttingand consolidation of manufacturing and development.
Even so, few expect major growth in computers for the rest of this year under the continuing weight of weak demand and declining prices. In fact, analysts predict such industry leaders as IBM, Compaq Computer, and Digital Equipment will keep losing market share to such clonemakers as Dell Computer. This low-cost producer of direct-mail computers posted a 79% profit in the first quarter.
If the economy begins to pick up in earnest, such cost-conscious manufacturers should continue to thrive. Says Paul Getman, managing director of Regional Financial Associates Inc., an economic forecasting firm in West Chester, Pa.: "1991 was the year everyone wants to forget. Things will accelerate in 1992 as companies get leaner and meaner." Sounds nice, but don't expect any jubilation in the boardroom. This time, the celebrating won't start until the recovery is signed, sealed, and delivered.
WINNERS AND LOSERS IN FIRST-QUARTER PROFITS THE INDUSTRIES THE SHARPEST GAINS Percent change from 1991's first quarter FOREST PRODUCTS 441% SAVINGS & LOANS 339 APPLIANCES 211 GLASS CONTAINERS 143 MACHINE & HAND TOOLS 109 HOTEL & MOTEL 108 TRUCKING & SHIPPING 78 SEMICONDUCTORS 71 RAILROADS 55 BANKS-SOUTH & SOUTHEAST 48 ENTERTAINMENT 47 FINANCIAL SERVICES 41 AEROSPACE 39 PUBLISHING 38 INSTRUMENTS 34 THE DEEPEST DROPS Percent change from 1991's first quarter AIRLINES LOSS TRANSPORT. SERVICES LOSS STEEL LOSS SPECIAL MACHINERY LOSS BANKS-WEST & SOUTHWEST 96% OIL & GAS 57 RETAILING 53 ALUMINUM 49 PAPER CONTAINERS 24 OTHER METALS 24 PAPER 23 CHEMICALS 23 DRUG DISTRIBUTION 22 COAL 18 COMPUTERS & PERIPHERALS 15 ALL-INDUSTRY AVERAGE: +7% THE COMPANIES WHO MADE THE MOST Millions of dollars EXXON $1,350 PHILIP MORRIS 1,099 GENERAL ELECTRIC 1,058 AT&T 883 WAL-MART STORES 602 IBM 595 MERCK 569 BRISTOL-MYERS SQUIBB 547 DU PONT 482 KMART 479 PROCTER & GAMBLE 474 JOHNSON & JOHNSON 464 BELLSOUTH 461 ELI LILLY 443 BOEING 441 WHO LOST THE MOST Millions of dollars FEDERATED DEPT. STORES $967 R. H. MACY 672 SECURITY PACIFIC 496 DIGITAL EQUIPMENT 294 CHRYSLER 231 FEDERAL EXPRESS 193 DELTA AIR LINES 152 CATERPILLAR 132 WOOLWORTH 128 McCAW CELLULAR 119 VARITY 115 GLENFED 107 CARTER HAWLEY HALE 102 UAL 92 PHILLIPS PETROLEUM 88 DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC.