That Sinking Feeling Hits Business AgainMonica Roman
The recession arrived in full force during the fourth quarter of 1990, as fear of war in the Middle East and rising fuel prices put the spending plans of many consumers and companies on ice. The chill in demand sent the earnings of the 900 companies in BUSINESS WEEK's Corporate Scoreboard down 12% from the 1989 fourth quarter. And profits slipped 7% for the year, just as they did in 1989.
Despite weak demand, revenues grew 10% in the quarter. But some of this increase can be attributed to rising fuel prices. Without the oil and gas companies, sales rose only 6.8%. For the year, revenues were up 8% for all companies, down slightly from 10% in 1989.
If higher energy bills and the threat of war weren't enough to spook normally free-spending Americans, the fear of unemployment was. During the second half of 1990, companies trimmed payrolls and kept inventories lean in anticipation of a recession. This strategy may have frightened consumers, but it also set the stage for a rebound in profits later this year. "Companies laid off workers at the first sign of economic weakness," says Mark M. Zandi of Regional Financial Associates Inc. in West Chester, Pa. "But that's laying the foundation for profits to jump quickly because of reduced overhead and costs."
VICTORY SPENDING. Economists remain divided about whether the U. S. was in a recession before Iraq invaded Kuwait last August. But many agree that the victorious end to the war could lead to a surge of consumer confidence and stronger demand for autos and other goods. Kurt Karl, senior economist at WEFA Group Inc., is projecting a 10% increase in 1991 corporate profits. "The price of oil is down substantially, so that's money into the pockets of everyone who buys gasoline," says Karl. At the same time, profits should benefit from lower interest rates and the Federal Reserve Board's easing of money supply.
While most corporations saw Saddam Hussein as the grinch who stole Christmas, the gulf crisis was a windfall for energy producers. In the fourth quarter, earnings of oil and gas companies rose 195%. Without the massive profits from the energy companies, that 12% earnings decline for the BUSINESS WEEK Scoreboard would have been 19.9%.
Energy wasn't the only sector that came through the fourth quarter in good stead. Computer sales held up better than expected, giving a lift to IBM. Big Blue's profits jumped 316% from the 1989 quarter, when it took a $1.5 billion aftertax charge to consolidate operations and eliminate 10,000 jobs.
IBM earned $6.02 billion in 1990, recapturing the No. 1 position in BUSINESS WEEK's ranking of the Top 25 profit leaders. IBM headed the list in 1988, but it was ousted in 1989 by General Motors Corp. GM didn't even make the Top 25 in 1990 because it lost nearly $2 billion. Not surprisingly, the energy companies were well represented among BUSINESS WEEK's Top 25 earnings leaders. Exxon Corp.'s 1990 profits of $5.01 billion vaulted it to No. 2 on the list. Chevron, Mobil, and Amoco all made the top 10 in 1990, though none of them held that distinction in the previous year. By jumping from fifth to second place, Exxon's earnings surpassed those of General Electric Co., which ranked third. Philip Morris Cos. came in fourth, followed by American Telephone & Telegraph Co.
In terms of sales, GM was still king of the hill in 1990. But Exxon moved ahead of Ford Motor Co. to take the No. 2 position. IBM and Mobil were Nos. 4 and 5, the same as in the previous year.
For the oil companies, the fourth quarter was the best of times. But for the automotive sector, it was the worst. Consumers were in no mood to make big purchases with the threat of war and a possible energy shortage, not to mention the gloomy state of the economy. The cars-and-trucks group reported a loss of more than $1 billion for the year. Chrysler Corp. was the only one of the Big Three auto makers to show a profit in the fourth quarter. Ford lost $518.5 million in the quarter but earned $860 million for the year.
FOREIGN EARNINGS. Although the U. S., Britain, and other English-speaking countries were mired in recession during the fourth quarter, economic growth continued in other parts of the world. As a result, some U. S. companies with large export or foreign operations showed good profit gains, with a little help from the weak dollar. "American companies were saved by net exports in the fourth quarter," says Jason Benderly, president of Benderly Economic Associates of Vail, Colo.
Eastman Kodak Co. was a case in point. Thanks to moderate sales increases outside the U. S. and gains from converting strong foreign currencies into dollars, Kodak reported net income of $326 million in the fourth quarter. That compared with a $60 million loss in the 1989 quarter, when Kodak took a $525 million charge to cover restructuring costs.
Kodak was one of dozens of companies that took large write-offs during the fourth quarter of 1989, which is one reason why the latest quarter didn't look so bad in comparison. Susan C. Lakatos, a vice-president at Kidder, Peabody & Co., estimates that write-offs by companies in the Standard & Poor's 500-stock index totaled $1.22 a share in the fourth quarter of 1989. By contrast, write-offs and provisions against bank loan losses accounted for 75~ a share in the latest quarter.
In some ways, the strength of energy companies in the 1990 fourth quarter was an aberration. For the year, the group that had the biggest percentage increase in profits was health care, with a 61% gain. Next were tobacco, with a 49% increase; aerospace, with 41%; entertainment, with 39%; and drugs and research, with 36%.
The real estate group had the largest percentage decline in earnings during 1990, with a 77% decrease. Other groups that fared poorly for the year include the tire and rubber group, which had a 67% drop in earnings; auto parts, with a 61% decline; aluminum, with a 51% drop; and appliances, with a 49% decrease. Industries that recorded a loss for the year include textiles, steel, savings and loans, airlines, and cars and trucks.
As spring approaches, many economists are predicting that the freeze in consumer and corporate spending will begin to thaw. With interest rates down, inventories and payrolls lean, and the dollar competitive, corporate profits should bounce back in the second half of the year, says Stephen S. Roach, senior economist at Morgan Stanley & Co. Roach still thinks earnings will be down for the year but that they will turn upward sharply in 1992. That would be welcome news for companies battered by two consecutive years of disappointing profits.
THE LEADERS IN 1990 THE TOP 25 IN SALES 1990 sales Percent change 1989 Millions of dollars from 1989 rank 1 GENERAL MOTORS $124,705 -2 % 1 2 EXXON 107,197 22 3 3 FORD MOTOR 97,650 2 2 4 IBM 69,018 10 4 5 MOBIL 64,244 14 5 6 GENERAL ELECTRIC 58,414 7 6 7 SEARS, ROEBUCK 55,972 4 7 8 PHILIP MORRIS 46,226 16 8 9 CHEVRON 42,600 30 16 10 TEXACO 41,822 17 14 11 DU PONT 40,047 13 12 12 CITICORP 38,385 1 9 13 AT&T 37,285 3 11 14 WAL-MART STORES* 32,602 26 17 15 K MART 32,448 14 15 16 CHRYSLER 30,620 -13 13 17 AMOCO 28,012 17 19 18 BOEING 27,595 36 22 19 PROCTER & GAMBLE 25,848 14 20 20 AMERICAN EXPRESS 24,332 -3 18 21 AMERICAN STORES* 22,156 1 21 22 UNITED TECHNOLOGIES 21,783 10 25 23 OCCIDENTAL PETROLEUM 21,694 8 24 24 ITT 20,691 3 23 25 USX 20,659 10 28 * Fiscal year ended January or February, 1991SALES AND PROFITS THE TOP 25 IN EARNINGS 1990 profits Percent change 1989 Millions of dollars from 1989 rank 1 IBM $6,020 60 % 4 2 EXXON 5,010 68 5 3 GENERAL ELECTRIC 4,303 9 2 4 PHILIP MORRIS 3,540 20 6 5 AT&T 2,735 1 7 6 DU PONT 2,310 -7 9 7 CHEVRON 2,157 759 201 8 MOBIL 1,928 7 12 9 AMOCO 1,913 19 14 10 MERCK 1,781 19 15 11 BRISTOL-MYERS SQUIBB 1,748 134 51 12 PROCTER & GAMBLE 1,733 24 18 13 ATLANTIC RICHFIELD 1,688 -14 11 14 BELLSOUTH 1,632 -4 13 15 GTE 1,541 9 17 16 TEXACO 1,450 -40 10 17 AMERICAN INTL. GROUP 1,442 5 19 18 BOEING 1,385 105 62 19 DOW CHEMICAL 1,384 -44 8 20 COCA-COLA 1,382 16 23 21 BELL ATLANTIC 1,313 22 30 22 3M 1,308 5 20 23 WAL-MART STORES* 1,291 20 29 24 JOHNSON & JOHNSON 1,268 17 28 25 AMERITECH 1,254 1 22 DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC. HITS BUSINESS AGAIN1990? TRY WAR FEARS, LAYOFFS, AND HIGHER ENERGY COSTS ILLUSTRATION BY ANDREA WISNEWSKI