An O.K. Quarter With One Big Blue ExceptionSunita Wadekar Bhargava
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.
WINNERS AND LOSERS IN SECOND-QUARTER PROFITS 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 CONSTRUCTION & REAL ESTATE 71 OIL & GAS 70 AUTO PARTS 65 BANKS-EAST 60 TRANSPORTATION SERVICES 55 COMPUTER SOFTWARE & SERVICES 44 THE DEEPEST DROPS Percentage change from 1992's second quarter COMPUTERS & PERIPHERALS LOSS 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 Millions 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 BRISTOL-MYERS SQUIBB 521 DUPONT 516 FANNIE MAE 499 JOHNSON & JOHNSON 495 WHO LOST THE MOST Millions 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 **FISCAL FOURTH QUARTER DATA: STANDARD & POOR'S COMPUSTAT SERVICES ALL-INDUSTRY AVERAGE: +13