At Least Profits Are Recovering

Happy days are here again--or at least it's starting to look that way. For the second quarter in a row, U.S. corporate profits showed signs of a comeback. Profits before extraordinary items rose 20% on average in the second quarter at the 900 companies in BUSINESS WEEK's Corporate Scoreboard. For the first six months of 1992, earnings increased 11%, while revenues grew 4%.

Cost-cutting and low interest rates saved the day in the second quarter. Although revenues rose a mere 5%, according to Standard & Poor's Compustat Services Inc., net margins reached 4.6%--the highest level in two years (chart)--up from 4.3% in the first quarter. These results do not, however, include General Motors, which had not yet released its numbers for the second quarter.

TEPID. Many economists greeted the profits picture with a marked lack of enthusiasm, and some viewed second-quarter results as downright doleful. Yet some industries managed to post solid turnarounds in profits. Notable winners were banks, which gained $4.1 billion, or 75%, over last year's second quarter, and the auto industry, which had a gain of $987 million after a loss last year. Among the losers were airlines--$520 million--and computer manufacturers--$276 million. Profit problems continued to plague fuel companies as well. Their profits dropped 26%, to $2.5 billion. In fact, the fuel numbers turned out to be so bleak that had those results been excluded from the Scoreboard, the picture would have been significantly brighter: Instead, earnings would have climbed 26%.

The banks' numbers may be the start of something big, says Raphael Soifer, bank analyst at Brown Brothers Harriman & Co. The low cost of funds and the continuing effects of productivity gains helped most banks boost their earnings, including heavyweights such as Chemical, Citicorp, J. P. Morgan, and Bankers Trust New York. Citicorp reported a second-quarter profit of $171 million, mainly from asset sales and $1 billion in reduced annual expenses. Chemical Bank's $240 million in earnings was slightly disappointing: Analysts expected to see more positive results following its merger with Manufacturers Hanover. Banks in every region of the U.S. showed significant gains--with a few exceptions such as BankAmerica, whose profits fell 12%.

Riding surging sales of sport-utility vehicles, trucks, and vans, Ford Motor and Chrysler posted surprisingly strong second-quarter net incomes of $502 million and $178 million, respectively. The carmakers' earnings got an added push from strong showings in their finance arms. Cutting subsidized sales to rental-fleet buyers also helped. Despite these turnarounds, nobody thinks Detroit is out of the woods--especially considering the overall sluggishness of the economy. The third quarter is traditionally Detroit's weakest, as plants shut down to prepare for new models. And the fragility of the recovery has automobile manufacturers uneasy about the fourth quarter, too.

MIXED SIGNALS. While bankers and carmakers rejoiced in their second-quarter fortunes, the oil industry struggled to get its bearings. Profits for most of the major oil companies, including Exxon, Texaco, and Occidental Petroleum, were hurt by layoffs, restructuring charges for consolidation of assets, and write-downs of domestic assets. A few companies, such as Phillips Petroleum, Kerr-McGee, and Atlantic Richfield, reported improvements because of cost-cutting and favorable comparisons to poor showings last year.

Some oil industry analysts predict across-the-board improvement in the second half, in part because of natural gas. "Gas prices should do 15% to 20% better in the third quarter over those last year," says George J. Gaspar, an analyst at Robert W. Baird & Co.

Falling prices, brought on by battles for market share, were the undoing of U.S. airlines last quarter. Delta Air Lines reported a particularly big loss--$180 million--as it continued to be rocked by both fare wars and high costs associated with its new European routes. The third quarter is traditionally strongest for airlines, but many believe the bleak results for Delta, one of the nation's largest carriers, foreshadow what could be a turbulent second half for the industry.

While the airlines' rough times have been widely reported, utilities were suffering more quietly. Unusually cool weather over much of the U.S. in spring and early summer lowered revenues for most of the majors, compared with the same period in 1991, when an abnormally hot May and June set air conditioners humming.

PRICE WAR. Computer makers lost a total of $276 million, a lot better than last year's $1.5 billion loss. For the quarter, Digital Equipment took write-downs to help defray costs of further layoffs and plant closings, resulting in a loss of $1.86 billion. IBM's profits, on the other hand, soared almost fivefold, to $714 million. Yet even as the computer giant continued with its cost-cutting measures, the vicious U.S. price war in personal computers held back the profits of Big Blue, as well as those of most other hardware makers.

Consumers have taken advantage of low PC prices, but in general they remain extremely reluctant to open their wallets. Consumer spending slipped 0.3% in the second quarter, after climbing 5.1% in the first quarter. In late July, as many companies were reporting their first-half earnings, the Commerce Dept. reported that the economy grew only 1.4% in the second quarter--less than half the first quarter's growth rate. The U.S. is in a "prolonged period of substandard economic growth," complains F. Ward McCarthy, an economist and principal at Stone & McCarthy Research Associates Inc. in Princeton, N.J.

While some economists are now predicting gross domestic product growth of 3% for the remainder of 1992, others are looking back on the first quarter as a flame that blazed brightly and briefly. "It's a spurt-and-stall economy," says David Wyss, research director at DRI/McGraw-Hill. "It has run into a basic stone wall, since there is no personal income out there."

Still, it shouldn't be difficult for most of Corporate America to post solid third-quarter gains compared with 1991. Last year's third quarter was one of the worst in ages, with the recession and restructurings driving down profits by 22%. This time, analysts expect gains of 15% to 19%.

But the big question is how long companies can sustain the positive earnings trend against the wobbly economy and the uncertainties of an election year. Obviously, cost-cutting and low interest rates will continue to be helpful. But in the absence of any real economic pickup, there's only so much they can do.

               Percent change from
                1991's second quarter
      TEXTILES             1,372%
      AUTO PARTS             276
      BANKSEast             193
      TIRE & RUBBER          191
      SEMICONDUCTORS         137
      REAL ESTATE            126
      RAILROADS              118
      ENTERTAINMENT          111
      POLLUTION CONTROL       76
      COMPUTER SOFTWARE       72
      BANKSWest & Southwest  64
      HOTEL & MOTEL           59
      GLASS CONTAINERS        47
      MACHINE & HAND TOOLS    45
                     Percent change from
                  1991's second quarter
      AIRLINES               LOSS
      OTHER METALS           LOSS
      ALUMINUM               -85%
      FOOD RETAILING         -49
      OIL & GAS              -26
      COAL                   -22
      CONTAINERS             -11
      MACHINERY              -10
      PAPER                   -7
      FOOD DISTRIBUTION       -6
      AEROSPACE               -4
                         of dollars
      PHILIP MORRIS         $1,353
      GENERAL ELECTRIC       1,216
      AT&T                     961
      EXXON                    955
      IBM                      714
      MERCK                    653
      COCA-COLA                581
      FORD MOTOR               502
      JOHNSON & JOHNSON        464
      BELLSOUTH                458
      BOEING                   453
      GTE                      446
      DU PONT                  440
                           of dollars
      DIGITAL EQUIPMENT*        $1,855
      AMOCO                        478
      REVCO D. S.*                 329
      CSX                          322
      CYPRUS MINERALS              292
      R. H. MACY**                 226
      DELTA AIR LINES*             180
      AMR                          166
      UAL                           95
      McCAW CELLULAR                86
      USAIR                         85
      CERIDIAN                      70
      A&P***                        66
      BETHLEHEM STEEL               64
      BAKER-HUGHES**                62
      *Fiscal fourth quarter
      **Fiscal third quarter
      ***Fiscal first quarter
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