The Profits Party Just Keeps On Going

A lot of big gains in earnings--and quite a few huge ones--mark an excellent quarter

Despite rising interest rates and a gyrating stock market, Corporate America kept its foot firmly on the gas pedal in the first three months of the year. Net profits zoomed 27%, and revenues 16%, for the 900 companies on Business Week's Corporate Scoreboard. The gain left 1999's first-quarter earnings drop of 5% in the dust and marked the fourth straight quarter of earnings growth.

What's fueling the profits engine? Overseas economies such as Asia and Latin America are still rebounding, while pricing power is returning for many companies. Commodities such as steel, pulp, and oil have all seen recent hikes, juicing profits for those industries. Demand, meanwhile, is still running strong. Real consumer spending jumped 8.3% in the first quarter, up from 5.9% in the fourth, and unemployment is near a 30-year low. Add high- octane gains in the telecommunications and technology sectors, and the year got off to one fast start.

Even in the midst of plenty, though, there are laggards. Rising energy prices slammed the airline industry, where first-quarter earnings fell 34%, to $362 million. Beverages are hurting, as Coca-Cola Co.'s earnings fell $58 million because of a restructuring, an asset writedown in India, and bloated bottler inventories. But overall, Corporate America is speeding along nicely. "We're seeing strong growth across the board for U.S. companies," says Richard B. Berner, chief U.S. economist for Morgan Stanley Dean Witter. "And the improvement of the global economic backdrop is going straight to the bottom line for multinational companies." First-quarter gross domestic product grew by 5.4%, according to government estimates, below the fourth quarter's 7.3% but still impressive this late in the game for America's economic expansion.

ON THE REBOUND. Citigroup took home the crown as overall earnings champ, with a 44% increase in first-quarter profits, to $3.6 billion. Citigroup's corporate and investment-banking business earned $1.84 billion in the quarter, up 36% from a year ago, while its Salomon Smith Barney unit contributed a record $957 million in profits in the quarter. Another big factor was the $634 million Citi earned on its investments, up from $90 million in the period in '99.

Global demand and greater pricing power boosted the bottom line at some Old Economy companies. Thanks to OPEC production cuts in the face of rising demand, U.S. crude oil prices climbed to more than $28 a barrel, up from more than $13 in first-quarter '99. That helped Exxon Mobil Corp. rack up first-quarter earnings gains of 135%, to $3.5 billion. Price hikes also helped the steel industry to a 365% earnings rise in the quarter. Cold-rolled sheet steel soared to as high as $450 a ton after dipping to $340 in 1998, thanks to strong demand here and overseas. Paper producers also helped themselves to higher prices. With pulp prices climbing 13%, to $680 per ton, Weyerhaeuser Co., the industry leader, saw earnings jump 495%. "The global commodity indexes have been down for years due to Asia," says Lynn Michaelis, director of market research for the company. "We are just rebounding now from what was extremely low levels."

The picture was mixed when it came to technology. With the Y2K scare behind them, companies were able to focus on long-term computing needs. Business investments in equipment and software increased 24% in the first quarter, vs. just 4% in the fourth. That helped the software and services industry post an 83% earnings gain. Industry leader Microsoft Corp., which now faces uncertainty as it fights a government proposal to split it apart, surged ahead with earnings of $2.39 billion on $5.66 billion in sales, up from profits of $1.9 billion on $4.6 billion in sales in the year-ago quarter. Hardware makers, however, didn't fare as well, since many companies purchased new Y2K-ready machines in the fourth quarter. Microsoft, for one, remains wary. "Our outlook for how quickly growth rates on business PCs accelerate is cautious for the [current] quarter," says Chief Financial Officer John Connors.

Technology, in particular the Internet, helped General Electric Co. power ahead in the first three months of the year. With earnings growth hitting 20%, the company credited its efforts to move business to the Web as an important driver in revenue gains and cost savings. Meanwhile, GE's traditional businesses, such as power systems, continued to account for huge sales gains. The trick for GE: keeping up the torrid pace, especially after the retirement of Chief Executive Officer John F. Welch Jr. in 2001.

MANAGEMENT MESSES. Still, some companies, beset by one-time earnings hits and capital expenditures, struggled. Warner-Lambert Co. suffered the biggest quarterly loss, $1.4 billion, thanks to a $1.8 billion termination fee paid to American Home Products Corp. in the wake of a collapsed merger agreement. Sprint PCS, the wireless unit of Sprint Corp., which plowed $693 million into the expansion of its wireless network, lost $510 million in the quarter.

Other companies suffered from simple management foul-ups. Xerox Corp. lost $243 million in the first quarter, thanks in part to a botched reorganization that caused billing and administrative problems and disrupted customer relationships. Bank One Corp.'s first-quarter earnings dropped from $1.15 billion in the opening quarter last year to $689 million this year. A key reason: problems in First USA, its troubled credit-card unit, which contributed just $70 million to earnings in the first quarter, down from $303 million last year.

By and large, 2000's first quarter has gotten the year off with a bang. Still, some are worried about future actions from the Federal Reserve. "The Fed is serious about controlling the economy," says MFR International's U.S. economist Suzanne M. Rizzo. "They'll want to slow consumer spending down from 8% to a more manageable 3% to 4%." Fed actions, however, may not be a match for strong employment rates. The speed limit for the rest of 2000 may just get raised a little higher.

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