It looks as if Wall Street underestimated Corporate America's ability to keep the profit engine humming. At 2005's start, analysts fretted over oil prices, interest rates, and slower economic growth. Analysts surveyed in January by Thomson First Call projected profit growth of just 7.6% for the companies in the Standard & Poor's 500-stock index.
But as earnings have come in from early filers, the first quarter looks much better than expected. Thomson First Call now says S&P 500 companies are on track to post a 13.2% hike in net income from continuing operations, excluding extraordinary and special items. And at the 298 companies that had posted by the morning of Apr. 27, revenues were up 9.1%.
What gives? For starters, sky-high oil and gas prices haven't dragged everyone down: Profits at energy companies are soaring. Thomson First Call estimates energy companies will pull in more than a quarter of the S&P's overall profit growth. Elsewhere, many businesses are handling the economy's speed bumps well. Continued efforts to cut costs are yielding robust results, and pricing power is helping everyone from consumer-goods makers to heavy manufacturers boost profits, too.
Still, with the economy slowing somewhat, the tide is no longer lifting all boats. The numbers also make clear that in many areas earnings growth is increasingly being driven by a few key players. By putting a laser focus on what their customers want and responding with superior products and services, leaders are consolidating their gains over weaker rivals and walking away with an ever-larger share of earnings in their sectors.
Take tech hardware, where innovation has been key to growth. Apple Computer Inc. (AAPL ) is a prime example: Its ability to devise popular additions to its line of iPod music players has left rivals struggling. And Apple is using the iPod's halo effect to draw PC users to its Macintosh computers. As a result, Apple posted $290 million in net income from continuing operations before extraordinary items in the first quarter, up 530% from a year ago. Motorola Inc. (MOT ), too, drew more than its share of customers. Thanks to a bevy of hot-selling phones, including the stylish Razr, it grabbed a bigger chunk of the market and saw earnings grow 48%, to $692 million.
Elsewhere in techdom, a similar sorting out is occurring. Intel Corp. (INTC ), by betting on the spread of wireless devices based on its chips, had a blowout quarter: Profits jumped 25%, to $2.2 billion. Advanced Micro Devices Inc., meanwhile, posted a $17 million loss because of falling flash-memory prices.
Among the online giants, Google Inc. (GOOG ) and Yahoo! Inc. (YHOO ) are beating expectations as Web ads capture a rising portion of overall ad budgets. That's boosting the price of search ads, the most popular on the Net. But good news for them is bad news elsewhere: Amazon.com Inc. (AMZN ), eBay Inc. (EBAY ), and other online merchants that have to pay those higher ad rates are seeing their earnings growth slow or stumble. Thanks in part to a 32% rise in its quarterly marketing expenses, Amazon's earnings fell 53%, to $52 million.
The benefits of focusing on the right part of the market aren't limited to tech. Smart manufacturers have used a similar strategy to run circles around rivals. One is heavy-truck maker PACCAR Inc. (PCAR ). Sure, the upswing in global freight traffic helped it post record quarterly profits of $274 million, a 50% jump from a year ago. But because PACCAR focuses on custom-built trucks, it can charge more than such rivals as Navistar International Corp. (NAV ).
Can Corporate America keep this up? Analysts expect second-quarter earnings growth of 7.2%. Not bad, given the economy's signs of slowdown. But if the Street again underestimates, no one will be disappointed.
By James Mehring in New York, with bureau reports