A Well Oiled Profit Machine

Corporate America's tireless profit machine continued to chug along in the first quarter. Powered by a combination of strong economic growth and lower operating costs, earnings for the 900 companies on BUSINESS WEEK's Corporate Scoreboard rose a robust 30% in the first quarter. That's slower than the phenomenal 71% advance posted in the previous quarter, but still nearly double the 16% growth rate of a year ago. "It's the Energizer Bunny recovery," says John Ryding, senior economist at Bear, Stearns & Co. "It just keeps on going and going."

Credit the confidence of both consumers and corporations for the profit expansion. Gross domestic product grew 2.8% in the first quarter, down from 5.1% in the fourth, but still strong enough to encourage spending. In the first quarter, capital spending on new plants and equipment leaped by an annualized rate of 19%, compared to a 14% increase for all of 1994. In all, sales rose 12% in the first quarter, to $1.2 trillion--the biggest jump in seven years.

Once again, recent corporate restructuring gave some added thrust to profits. Thanks to lower operating costs, profit margins widened to 6.5%, from 5.6% in 1994's first quarter. The weaker dollar also helped. Corporations such as Coca-Cola Co. and Procter & Gamble Co. reported better profits in the first quarter, in part because of higher sales in Asia and Europe. Many economists believe the dollar's fall on currency markets will continue to fuel U.S. export sales in some regions.

Sustaining this profit expansion is bound to get tougher for the remainder of 1995. "As we go through this year and into 1996, profit momentum will diminish as the economy slows down," says Richard D. Rippe, chief economist at Prudential Securities Inc. BUSINESS WEEK economists believe GDP growth will slow to 2% by the final quarter.

DISTURBING TRENDS. General Motors Corp. headed the list of BUSINESS WEEK's top 15 earners during the first quarter. The nation's biggest carmaker saw its profits climb by 34%, to a record $2.2 billion. A healthy consumer appetite for such popular models as the Chevrolet Lumina and Blazer helped drive up GM's sales by 15%, to $43.3 billion. The benefits of cost-cutting were also obvious, as GM's margins widened to 5%, from 4.3% in 1994's first quarter. Ford Motor Co.'s strong performance earned it the No.3 place among the top profit performers, as its earnings soared 71%, to $1.6 billion, on a 14% sales increase to $34.8 billion.

The auto makers are unlikely to keep up the torrid profit pace. Both GM and Chrysler reported weaker U.S. sales in April, the start of the second quarter. And a closer look at first-quarter results reveals disturbing trends. For example, much of Ford's profits came from European sales and gains by Ford's financial services. Earnings at Ford's U.S. auto operations rose only 1.1%, to $825 million, because of higher costs to develop new models and upgrade existing ones.

Evidence that Motown may be entering a slump was perhaps most striking at Chrysler Corp., which is fending off a hostile takeover by financier Kirk Kerkorian. Earnings at the company, which has no significant sales outside North America, fell 37%, to $592 million, on a 3% sales increase, to $13.6 billion. Chrysler's profits were also hit by a $115 million pre-tax charge to fix the rear latches on its minivans and the cost of production changeovers for its new minivan.

As a group, computer makers were big winners in the first quarter. IBM's profits surged 229%, to $1.3 billion, on an impressive 18% jump in sales to $15.7 billion. Sales of its mainframes were especially strong. Big Blue also benefited from the dollar's decline. Digital Equipment Corp. posted its first back-to-back profitable quarters in four years. The company earned $73.7 million, compared with a loss of $183.3 million a year ago. Sales increased 6%, to $3.5 billion. Cost-cutting, combined with rising demand for Digital's new Alpha 64-bit microprocessor, helped keep DEC in the black.

Not surprisingly, such cyclical industries as paper, steel, and chemicals posted strong gains as the economy rolled along. Rising demand and higher prices helped all three. Earnings at International Paper Co. rose 224%, to $246 million, as its sales rose 32%, to $4.5 billion.

The quarter also had its share of losers. As an industry, airlines were the worst performers. The first quarter is traditionally slow, as consumers stay home during the winter months. The biggest loser: USAir Group Inc., which lost $97 million, compared with a $196.7 million loss in the same period of 1994. The airline's revenues rose 5%, to $1.8 billion. Still, some analysts believe that after years of cost-cutting and tighter control of capacity growth, the industry may be poised for takeoff. "This is going to be the first profitable year they've had since 1989," says analyst Michael W. Derchin of NatWest Securities Corp.

Elsewhere, trading setbacks continued to confound some banks. Bankers Trust Co. was the biggest loser of the quarter, with its red ink totaling $157 million, compared with a profit of $164 million a year ago. The bank's revenues declined 1%, to $1.7 billion. Bankers Trust blamed losses in its derivatives business and Latin American trading.

Still, there were some bright spots on the trading front. Citicorp, for instance, reported a 36% profit gain, to $829 million, thanks largely to foreign exchange trading. More good news like that in the months ahead and Corporate America's profit momentum may keep going a while longer.

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