Corporate America's Energizer Bunny
It's deja vu all over again--again. Despite warnings by naysayers that Corporate America's profits machine was running out of gas over the past year, it fired up yet another cylinder. In the first quarter of 1997, earnings for the 900 companies on BUSINESS WEEK's Corporate Scoreboard rose 21%, to $86.9 billion, on a sales increase of 9%, to $1.3 trillion. "The bottom line is pretty simple: The economy is growing fast," says Chris Varvares, president of Macroeconomic Advisers LLC in St. Louis. "That, combined with relatively stable interest rates and well-behaved wages, makes an outstanding near-term environment for profits."
At the wheel was the consumer. In the first two months of 1997, consumer spending rose at a 4.9% annual rate, and April's consumer-confidence numbers remain close to March's eight-year high. While capital spending growth has begun to slow, it hasn't gone away. That's good news, say economists, since the rising dollar may hold export growth to 6% to 8%--less than half 1996's levels.
With price increases still hard to push through, many companies boosted earnings by eking out efficiencies. Cost-cutting and still-low benefits helped first-quarter margins widen to 6.7%, up from 6% a year earlier, while return on equity hit 17.4%. Sound impressive? You bet: Both numbers are the highest since BUSINESS WEEK started collecting the data in 1973. "We have underestimated the ability to continue getting productivity gains," says John Ryding, senior economist at Bear, Stearns & Co. He thinks profits will rise 8% to 10% in 1997--below 1996's 14% gain, but still healthy.
Still, rumblings of trouble lurk below the surface. The expansion's surprising strength may cause the Federal Reserve to hike short-term interest rates again on May 20. That could hurt rate-sensitive industries. Already, sales of new homes fell nearly 3% in March from February. BUSINESS WEEK economists think the hike could slow gross-domestic-product growth in the second half of 1997 to about 2.5%--down from 3.2% in 1996, and a projected 3.5% for 1997's first half.
GAS UP. Labor costs, too, are on the rise. First-quarter employment costs rose 2.9% from the first quarter of '96. "It's not going to get any better on the labor-cost front," says Rosanne M. Cahn, chief economist in the equity department of Credit Suisse First Boston Corp.
Topping BUSINESS WEEK's list of first-quarter earners was Exxon Corp. Strong crude oil and natural gas prices lifted the company's profits 15%, to a record $2.2 billion, on an 8% sales gain to $30 billion. The same winds also lifted Chevron's earnings 35%, to $831 million. Now, though, falling energy prices make a repeat performance unlikely.
Optimistic consumers and deep cost cuts helped auto makers win big last quarter. Leading the profit parade was General Motors Corp., whose profits jumped 125%, to $1.8 billion, on an 8% sales rise. Popular new models like its redesigned minivans gave GM's North American auto operations their best earnings in more than a decade. GM was also aided by an easy comparison: A strike in the first quarter of 1996 cut earnings by $900 million. And hacking $800 million out of costs in the first quarter helped Ford Motor Co.'s profits surge 125%, to $1.5 billion, on a 3% revenue rise. As for Chrysler Corp., its record $1 billion in profits was fueled by sales of minivans and sport-utility vehicles.
Not surprisingly, many in the computer industry continued to churn out big gains. IBM's earnings leaped 54% to $1.2 billion, on a sales increase of 5% to $17.3 billion. Strong personal-computer sales shored up sluggish mainframe sales at Big Blue, while a $435 million research-related charge in 1996's first quarter hurt the previous period's numbers. Software dynamo Microsoft Corp.'s earnings climbed 85%, to $1 billion, with revenues up 45%, to $3.2 billion, from brisk sales of its Windows 95 and Office 97 systems. And at Intel Corp., the shift to pricier Pentium MMX microprocessors lifted earnings 122%, to $2 billion, as sales rose 39%, to $6.4 billion.
Retailers made a comeback in the latest quarter, thanks to freer-spending consumers and improved inventory management. Fewer markdowns helped boost industry margins 1%, to 3.6%. The biggest improvement: Kmart, where cost cutting helped it earn $235 million, on sales down 2%, after a $118 million loss for the same period last year. And strong Star Wars toy sales lifted Toys `R' Us' profits 312%, to $382.9 million.
The banking industry also performed well. Chase Manhattan Corp. earned $927 million as revenues rose 4%, to $7.2 billion. That compared with an $89 million loss a year ago, after a $1 billion merger-related write-off. Overall, low interest rates, cost control, and growing fee income helped the industry. Citicorp's profits climbed 9%, to $995 million, while revenues rose 6% to $8.4 billion, as strong corporate banking results counteracted credit-card losses. "Credit deterioration was pretty strictly limited to cards," says Salomon Brothers Inc. analyst Diane Glossman.
While price hikes were hard to find, one exception was the airline industry, where strong passenger traffic boosted ticket prices--and profits. UAL Corp.'s earnings rocketed to $105 million, up from $6 million in the year-ago period, with sales up 10%, to $4.1 billion. With a healthy economy and modest seat-capacity increases, analysts think the good times should continue.
Still, not every industry scored big. Quaker Oats Co.'s sale of its Snapple brand to Triarc Cos. for $300 million--$1.4 billion less than it paid in 1994--dragged down the entire food-processing industry. And while financial-service companies' overall profits grew 12%, results were mixed. Heavy trading and investment banking activity helped bring record earnings at Merrill Lynch & Co. and Morgan Stanley & Co.; they rose 13%, to $465 million, and 16%, to $316 million, respectively. But Salomon's profits fell 44%, to $173 million, on slowing bond and commodity trading results.
Telecommunications companies also posted lower results. AT&T's profits plummeted 24%, to $1.1 billion, on a 2% sales gain, to $13 billion, because of tough competition and spending to enter local phone markets. Analysts say those factors will dilute results for years. BellSouth Corp.'s earnings fell 29%, to $693 million, but the comparison was skewed by a one-time gain in 1996's first quarter. Still, such poor results were the exception as profits hit overdrive--all over again.
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