An O.K. Quarter With One Big Blue Exception

Big Blue's protracted woes cast a long shadow over second-quarter corporate profits. The staggering $8 billion loss at IBM--following huge restructuring charges--dramatically toned down otherwise buoyant earnings news for Corporate America. Profits rose 13% on average for the 900 companies in BUSINESS WEEK's Scoreboard. If Big Blue's results were excluded, profits would have jumped 36%, compared with 27% in the first quarter's increase and a 20% profit rise recorded a year ago.

Cost-cutting and a slight uptick in the economy were largely responsible for the earnings increase. The U.S. economy grew at a sluggish 1.6% annual rate in the second quarter. But that was a lot better than the first quarter's 0.7%. True, overall revenues continued to grow modestly. Sales rose 5%, to $985 billion, in the second quarter, according to Standard & Poor's Corp.'s Compustat Services. But profit margins improved. Excluding IBM, net margins grew to 5.3%, the best margin recorded since the second quarter of 1989, when it stood at 5.8%.

Still, many economists were disappointed by the profit picture. "This is something of a half-speed recovery and can never match the strength of traditional booms," says economist Roger E. Brinner of DRI/McGraw-Hill.

Economists' biggest worry is that earnings growth could slow if sales don't improve significantly and the immediate benefits of restructuring, notably from payroll cuts, gradually disappear. In the absence of any significant rebound in the economy, Maureen Allyn, chief economist at Scudder, Stevens & Clark Inc., says corporate earnings might increase only 12.5% during the last half of 1993. And she warns that profit growth could average 9% for all of 1994.

SEARS ROBUST. Auto companies showed the sharpest profit improvement in the latest quarter. The combined earnings for the Big Three came to $2.3 billion, a far cry from the $138 million loss they suffered a year ago. True, the impressive results had a lot to do with the recent restructuring in previous quarters. But the bottom line also got a boost from strong vehicle sales--one of the few positive economic signs that emerged in the second quarter. Indeed, as a group, revenues rose 9%, to $79 billion. By far the biggest winner was General Motors Corp. The nation's biggest carmaker earned $889.1 million vs. a $703.2 million loss in last year's second quarter.

Bank earnings again surged ahead. Continued low interest rates and a drop in charges for bad loans helped. So did huge returns from trading securities and foreign currency. Citicorp saw its trading revenues rise by 82%, to $572 million. As a result of the friendlier banking environment, Citi's earnings rose 212%, to $446 million. Likewise, earnings at BankAmerica Corp. more than doubled in the latest quarter, to $488 million.

Retailers also boasted healthier bottom lines. As a group, profits for retailers rose 81%, to $2.3 billion, thanks to a 7% increase in sales and reductions in overhead. Sears, Roebuck & Co. provided one of the biggest surprises of the quarter with better-than-expected earnings of $1.09 billion, up 433% from a year earlier. Indeed, Sears ended up as the quarter's most profitable company behind Exxon Corp. Even though sales at Sears were off 4%, to $12 billion, analysts credit the company's cost cutting, including the closing of its catalog business, for improving margins.

Airlines also seemed to challenge conventional wisdom, with the industry posting its first profit since the third quarter of 1991. The winding down of incessant fare wars provided a big boost. Among the better performers was AMR Corp. The parent of American Airlines earned $47 million in the second quarter, compared with a loss of $183 million a year earlier. Meanwhile, railroad earnings bounded higher, thanks to increased freight traffic and recent cost-cutting. As a group, it posted the strongest profit growth of any industry--up 310%, to $872 million. Still, many analysts are concerned that the Midwest floods, which are wreaking havoc with routes and schedules, could curb railroad profit growth in the second half.

COMPUTER CRUNCH. The second quarter also produced its share of disappointments. Computers yielded a notable crop of losers. The group posted losses of $7.9 billion, largely because of IBM's staggering $8.9 billion pretax charge. But other leading computer manufacturers also had a bad time of it, as competition intensified and personal-computer price wars raged on. Apple Computer Inc. reported a loss of $188 million after taking almost $321 million in restructuring charges. Tandem Computers Inc., which makes computer networks, had a loss of $550 million after taking a $451 million charge for impending layoffs and plant closings.

Still, there were bright spots: Digital Equipment Corp. had its first profit in six quarters, thanks to drastic cost-cutting in the past 12 months. It earned $113.2 million vs. a loss of $1.9 billion a year earlier.

While the misfortunes of IBM and Apple have been widely publicized, chemical companies appeared to suffer in silence. With sales stagnant or falling because of the slow economy, industry profits fell 11%. Dow Chemical Co. was one of the worst hit, with profits down 23%, to $149 million. The results reflect a 1% dip in sales, to $4.8 billion, and a $180 million pretax charge taken by its subsidiary, Marion Merrell Dow Inc., to reduce its sales staff by 13%, or 1,300.

Going forward, many economists are betting that economic activity will pick up. Inventory levels are low, and that could spur production in the second half. But few see a sharp rebound. Consumers remain wary of tax increases and ongoing payroll cuts. Economists expect consumer spending in the second half to grow 3.5%, about the same pace as in the second quarter.

Another damper: continued economic weakness in Japan and Europe that could further hurt U.S. exports. Scudder Stevens' Allyn sees economic growth averaging between 2.5% and 3% in the second half. And most economists doubt that the pace will pick up in 1994. Indeed, Allyn warns that the growth rate might slow to 2%.

That doesn't bode well for profits. With the benefits of restructuring waning in the absence of stronger sales, Corporate America may have done as much as it could to help its bottom line for the time being. Now, it's up to the economy.

              THE INDUSTRIES   
              THE SHARPEST GAINS        
                      Percentage change from
                          1992's second quarter
      RAILROADS                  310%
      GAS UTILITIES              154
      FOREST PRODUCTS            130
      SEMICONDUCTORS             118
      SPECIAL MACHINERY          100
      FOOD RETAILING              93
      RETAILING                   81
      BANKS-WEST & SOUTHWEST      78
      INSURANCE                   74
      OIL & GAS                   70
      AUTO PARTS                  65
      BANKS-EAST                  60
      SERVICES                    44
                            Percentage change from
                            1992's second quarter
      STEEL                      LOSS
      SAVINGS & LOAN             LOSS
      ALUMINUM                   LOSS
      INSTRUMENTS                -66%
      PAPER CONTAINERS           -65
      POLLUTION CONTROL          -38
      TOBACCO                    -22
      COAL                       -19
      DRUGS & RESEARCH           -17
      FOOD PROCESSING            -14
      MISC. LEISURE              -14
      CHEMICALS                  -11
      PAPER                       -8
      TRUCKING & SHIPPING         -4
           THE COMPANIES
             WHO MADE THE MOST 
                           of dollars
      EXXON                 $1,235
      SEARS ROEBUCK          1,094
      PHILIP MORRIS          1,053
      AT&T                   1,044
      GENERAL MOTORS           889
      FORD MOTOR               775
      CHRYSLER                 685
      COCA-COLA                678
      GENERAL ELECTRIC         656
      MOBIL                    579
      INTEL                    569
      DUPONT                   516
      FANNIE MAE               499
      JOHNSON & JOHNSON        495
             WHO LOST THE MOST
                           of dollars
      IBM                   $8,036
      TANDEM COMPUTERS*        549
      USX-U.S. STEEL GROUP     333
      H.F. AHMANSON            291
      AMERICAN CYANAMID        229
      R.H. MACY*               228
      APPLE COMPUTER*          188
      AMERADA HESS             145
      OUTBOARD MARINE*         104
      FREEPORT-MCMORAN          84
      TEKTRONIX**               82
      AMAX                      80
      STONE CONTAINER           72
      CONNER PERIPHERALS        59
      QUANTUM CHEMICAL          52
      *FISCAL THIRD QUARTER         
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