Whoo-ee. It was one for the record books. Thanks to a robust economy and a strong dose of corporate cost-cutting, 1994 turned out to be the best year for company earnings in more than two decades. Profits for the 900 companies on BUSINESS WEEK's Corporate Scoreboard leaped by a stunning 40% last year--the biggest increase since BUSINESS WEEK began compiling industry data in 1973. Fourth-quarter profits jumped by an equally impressive 71%, the largest quarterly hike in six years.
These astonishing results provide the most convincing evidence so far that the painful restructuring of the past few years has produced profound changes throughout Corporate America. Lower operating costs--including restrained wage hikes--have combined with technological improvements to yield huge productivity gains. The upshot: Profit margins widened sharply, to 5.7% last year from 4.3% in 1993. Margins haven't looked this healthy since 1988.
And much of the improved cash flow was fed back into the economy. Thanks in part to huge capital spending on plants and equipment, total sales climbed 11% in the fourth quarter; for the year, they were up 9%. Such growth hasn't been seen since the prerecession days of 1989. Also contributing to the spending spree: renewed confidence in the economy. After growing by 3.1% in 1993, gross domestic product expanded by 4% last year.
Few economists see profits growing at such a pace in 1995, although performances will vary widely from industry to industry. A slower economy will likely trim profit gains. BUSINESS WEEK economists believe GDP will probably grow by about 2.5% this year. Still, many believe the level of corporate investment will remain high. Many also expect an eventual uptick in wages. While that could squeeze margins, wage hikes would fuel consumer spending. "Profit growth will be there, but it's not going to be 40% or even close to it," says Douglas P. Handler, a senior economist at Dun & Bradstreet Corp.
EUROPEAN PICKUP. General Electric headed the list of BUSINESS WEEK'S Top 25 earners in 1994. Excluding huge losses from discontinued operations at its Kidder, Peabody & Co. unit, GE's earnings climbed by 41%, to $5.9 billion, as sales rose 8%, to $60.1 billion. The company's cyclical businesses, such as appliances and plastics, thrived along with the economy. GE Financial Services also prospered, especially because of the strong performance of such businesses as credit cards and retail financing.
General Motors and Ford Motor were close behind GE, in second and third place, respectively. Why the great year in Motown? Consumers were so eager to get behind the wheel that carmakers could raise prices and cut rebates. Also helping out was the strong yen, which made Japanese cars relatively more expensive. GM saw profits surge 129%, to $5.7 billion, as sales rose 12%, to $155 billion. Meanwhile, Ford's profits increased 110%, to $5.3 billion. Chrysler Corp., No.7 on the Top 25 list, saw its profits climb 54%, to $3.7 billion.
Don't expect the Big Three to maintain 1994's breathless profit pace. There are signs sales growth is slowing. Still, Bear Stearns & Co. analyst Matthew T. Stover sees moderately higher profits this year, with European sales offsetting weaker growth for GM and Ford at home.
As an industry, computer makers showed the biggest profit improvement in 1994. Credit IBM's sharp turnaround, which also had a big impact on the entire Scoreboard. If it wasn't for IBM climbing out of the red, the Scoreboard would have shown a 33% profit gain. Big Blue earned $3 billion last year, compared with a loss of $8 billion in 1993. Sales were up 2%, to $64 billion. Analysts attribute the computer giant's recovery to extensive restructuring, modest revenue growth, and new-product development. "Those three trends should continue into about the middle of 1996," says John B. Jones, a technology analyst at Salomon Brothers Inc. He sees IBM's earnings rising at least 40% to 50% this year.
Apple Computer Inc. was also back in the black. The company posted profits of $458 million in calendar 1994 vs. a $34.7 million loss in the previous 12 months. Credit goes to strong demand for Apple's Power Macintosh. The sector also had its share of disappointments: Digital Equipment lost $2.1 billion in 1994 after a $1.2 billion charge for restructuring. DEC lost $92.3 million in 1993.
Telecommunications companies also fared well. A few Baby Bells showed the biggest improvements, by far, over 1993, a year of heavy write-offs related to downsizing. Pacific Telesis Group's profits soared 495%, to $1.1 billion, on flat sales. Long-distance carriers also had a good year, thanks to popular discount calling programs. AT&T and MCI Communications Corp. each posted a 27% earnings gain, to $4.7 billion and $795 million, respectively.
Despite its strength, the economy didn't have enough muscle to lift Wall Street last year. Rising interest rates devastated the stock and bond markets in the latter part of the year; a downturn in trading and underwriting volume also hurt. The sour environment was most keenly felt at Salomon Brothers, which lost $364 million vs. an $864 million profit in 1993.
Retailers also suffered, with profits falling 9%, to $10.1 billion, as women's apparel sales stayed sluggish. But it wasn't retailing that hurt Sears, Roebuck & Co., where profits plunged 48%, to $1.3 billion. Much of the drop reflected falling earnings at its Allstate Insurance Co. unit after the California earthquake. Profits at Sears Merchandise Group rose 18%, to $890 million, thanks to strong appliance sales--and a lot of cost-cutting. Now that it's in fighting trim, Sears, along with the rest of Corporate America, is enjoying the payoff as never before.