Still Flying With A Full Tank

Earnings leaped 17% in the second quarter: Five quarters in a row of double-digit gains

Don't talk about soft landings to corporate executives. What they want is a way to stay aloft. And after a year of raising interest rates, the Federal Reserve's strategy to tamp down any hint of inflationary growth seems to be working just fine. Earnings for the 900 companies on BUSINESS WEEK's Corporate Scorecard rose a robust 17% in the second quarter, on a 16% increase in sales. Although second- quarter earnings slowed from the torrid pace of the previous four quarters, they still marked the fifth straight quarter of double-digit gains.

Big increases in the computer chip and oil industries are by far the main ingredients sustaining profits. Even though the quarter's increase is far from the 28% jump in the second quarter of 1999, profit growth is still extraordinary. "The economy acts like it might slow down, but at this rate that would take a while," says Suzanne Rizzo, an economist at MFR International, a New York consulting firm.

Indeed, all of the major macroeconomic indicators remain strong, if somewhat less so than in past quarters. Second-quarter growth in gross domestic product came out healthier than anticipated: 5.2% on an annualized basis, vs. 5.4% in the first quarter. And inflation remains tame. The index covering personal consumption expenditures rose just 2.3%, after a mostly fuel-related 3.5% jump in the first quarter.

The second quarter's biggest winners were chipmakers and other component manufacturers, whose profits rose 271%. Leading the way were Intel, Texas Instruments, and Advanced Micro Devices, all of which gained, thanks to demand for PCs and wireless phones. AMD's profits rose 159%, with sales of its PC processors and memory chips for digital devices such as cameras and cell phones more than doubling in the quarter.

NOT ALL ROSES. No other company--tech or otherwise--topped the financial performance of database software maker Oracle Corp. In the company's fourth quarter ended in June, Oracle's net income was actually greater than its revenues. That's because the company earned nearly $4 billion in investment income, mostly from the sale of 12% of Oracle Japan. That deal, however, overshadowed what was legitimately a stellar quarter in Oracle's core business. Operating profits jumped 76%, owing to the popularity of Oracle's applications software.

But not all was rosy with tech companies. While Intel Corp.'s net earnings rose 79% in the quarter, to $3.1 billion, more than two-thirds of the profits came from investment portfolio gains. Operating income rose a scant 4%, dragged down by charges from the recall of some of its motherboards. Other computer companies had problems, too. IBM's earnings declined 19%, to $1.9 billion, on flat sales. Comparisons with last year were skewed by a big gain on the sale of one of IBM'S businesses last year. Still, revenues at all of the company's major business units were tepid at best. Similarly, second-quarter revenues at Microsoft Corp. grew just 1%, to $5.8 billion. While sales of PCs for consumers remained strong, corporate interest in the company's new Windows 2000 operating system has been underwhelming.

Not surprisingly, energy companies won big in the second quarter. With oil prices nearly doubling in the past year, profits shot up like a gusher. Earnings at Exxon Mobil, Chevron, Conoco, and Texaco all doubled or tripled. Cost-cutting also helped. Exxon Mobil Chairman Lee R. Raymond says that his company has generated "$800 million in savings" from head-count reductions and back office consolidations since Exxon's merger with Mobil last year. Exxon Mobil's profits rose 132%, to $4.5 billion.

Higher energy prices also improved the fortunes of companies such as electric utility FPL Group, refiner Valero Energy, and natural-gas pipeline operator El Paso Energy. Archer Daniels Midland Co., the big agricultural-product trader, shrugged off weak grain sales and delivered a 41% increase in earnings, to $59.6 million, in large part because of rising sales of its corn-based fuel additive ethanol, which is sold extensively in the Midwest.

The energy industry's good times, of course, translate to pinched wallets for other industries. Airlines, railroads, and other fuel-dependent transportation companies posted weaker earnings in the wake of higher fuel prices. Trans World Airlines Inc. saw a $4.2 million loss for the quarter, largely because of a $53 million increase in fuel expenses. Few companies were immune to higher oil prices. Quaker Oats Co. Chairman and Chief Executive Robert S. Morrison, for instance, says his company is having to swallow $25 million this year--half of that in the second quarter--in higher prices for petroleum-based resins used in its Gatorade bottles.

The biggest loser of all, however, was the steel industry. While U.S. Steel Group and a few other steelmakers posted better results than in the first quarter, LTV Corp. drove down the industry with a huge $272 million loss, due mostly to a pretax $205 million charge to shut down its iron ore mines. National Steel Corp., another loser, blamed an upsurge in imports and production snafus. Several big banks also came up losers because higher interest rates crimped earnings. But in many cases, the weaker results were self-inflicted. First Union Corp. and Bank One Co., for example, took $1 billion-plus restructuring charges relating to troubled recent acquisitions.

Still, Corporate America's solid quarterly performance may set the tone for the remainder of the year. Ironically, that "could be bad news for investors," says Prudential Securities Inc.'s Richard D. Rippe, whose firm is forecasting a 17% gain in profits this year and another round of rate hikes. The only question is how long U.S. companies can stay aloft before the Fed forces them to come in for a landing.

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