Profits: It's Not a Very Pretty Picture
It was a good year to be an oil executive. But for most of the rest of Corporate America, 2000 marked the end of a decade of economic exuberance. That much, at least, is clear from the mediocre earnings of the 900 companies on BusinessWeek's Corporate Scoreboard. Profits at those companies lurched ahead 14% last year--which sounds impressive until you compare it with the robust 19% gain of 1999. Worst of all is the direction things are headed: In the fourth quarter, the bottom dropped out.
Profits in the last three months of 2000 fell by an alarming 11% from the year before--the worst quarterly showing since the recession year of 1991. By contrast, a year ago, when the bloom was not yet off the dot-com rose and California still had lights, earnings in the fourth quarter rose 37% year-to-year. Need more evidence of how things have slowed down? Profit margins, excluding extraordinary items, fell to 4.6% in the fourth quarter, from 6.1% a year earlier. And while gross domestic product grew 3.5% last year, growth slowed to an annualized rate of 1.4% in the last quarter.
The problem for most companies wasn't finding business--revenues rose 17% in the fourth quarter and for the year. But sales outpaced earnings, which got hammered by skyrocketing energy prices--natural gas climbed 79% while oil was up by 57%--and higher labor costs. In the fourth quarter, hourly compensation rose 6.6%, boosting unit labor costs by 4.1%, the biggest jump in 18 months. Now there are signs that cautious consumers are pulling in the reins (page 54), which means sales are likely to slow as well. And economists aren't expecting a quick letup. "What these numbers show is we're moving into a major earnings recession," says Stephen S. Roach, chief economist at Morgan Stanley Dean Witter.
DETROIT DOLDRUMS. Higher energy prices made big winners of the oil companies. Exxon Mobil Corp. reported the highest-ever annual profit for a public company in 2000. It had net income of $16 billion, up 102% from 1999. Sales rose 29%, to $210.6 billion. High crude oil and natural gas prices, along with fat refining margins, also boosted profits at Texaco Inc. and Chevron Corp., which are in the process of merging, by 116% and 150% respectively.
But with gasoline prices rising and heating bills sucking away disposable income, durable-goods manufacturers were hit hard. Auto-industry profits fell 25% for the year and 76% in the fourth quarter. General Motors Corp.'s sales were so weak--zero gain in the last quarter and up only 5% for the year, to $184.6 billion--that for the first time since 1984, the auto giant was knocked off its perch as the sales leader. It finished behind Exxon and Wal-Mart Stores Inc., whose revenues rose 21%, to $186.2 billion. GM had its third-best year for profits ever, netting $4.45 billion. But fourth-quarter profits slipped 92%, to $89 million, as sales slowed amid rebates and discounts.
The jump in energy costs was just one of the problems facing steelmakers last year. Add to that an upsurge of imports and the abrupt slowdown for big customers, and you have what Thomas J. Usher, chairman of USX Corp., U.S. Steel Group's parent, calls a "devastating combination." The company reported a larger-than-expected loss of $139 million during a fourth quarter in which it lost $53 on every ton of steel it sold.
Airlines, meanwhile, had to contend with soaring labor costs. UAL Corp., the parent of United Airlines Inc., saw its labor costs rise 11% in the last quarter as it recorded a $265 million annual profit, down 79%, on 7% higher revenues of $19.4 billion. "We don't have a revenue problem," says UAL President Rono J. Dutta. "Our challenge is really on the cost side. We're not able to pass through costs quickly enough" to offset higher wages and fuel bills. Industry profits fell 39% in the year.
For some sectors, though, there is already a revenue problem. Computer buyers hit the brakes on new PC purchases, cutting revenues by 7% at Gateway Inc. in the fourth quarter. Gateway lost $94.3 million in that period, while Compaq Computer Corp. lost $672 million. That was enough to rain on what had otherwise been a sunny year for chipmakers. They benefited early from unexpectedly strong demand for PC components such as Pentium III processors, memory chips, and motherboards. Intel Corp., for instance, saw its fiscal 2000 revenue rise 15% over 1999, to $33.7 billion from $29.4 billion. Net income rose 44%, to $10.5 billion from $7.3 billion. But by the fourth quarter, Intel's sales growth had slowed to 6%, and profits were up only 4%. Intel is moving aggressively to speed adoption of its new Pentium 4 processor, but analysts warn that chip sales are likely to be flat in the first half as U.S. consumers remain uninterested in trading in their old PCs.
As business slowed and heavily indebted consumers began having problems repaying creditors, some big banks had to deal with large loan losses. Stumbling Bank One Corp. closed 2000 with one of its worst quarters ever--a $512 million loss--and increased loan-loss reserves by $1 billion.
The challenge for telecom companies is whether they can ramp up new data services fast enough to replace dwindling revenues from the traditional phone business. They didn't come close in the fourth quarter, when industry profits fell 66%. Battered by low long-distance rates and asset write-offs, AT&T posted a $1.6 billion loss in the three-month period, and profits fell 42% for the year. SBC Communications Inc.'s total revenues fell 5% last quarter and profits tumbled 25%, but the company claimed progress on the data front, where revenues rose nearly 42% for the full year, to $7.5 billion. SBC has become the largest U.S. supplier of digital subscriber lines, with 767,000 DSL customers at yearend. Says CFO Donald E. Kiernan: "We have a $7 billion to $8 billion revenue stream in data that's growing."
So there is some good news about profits. There's just not enough. "It's pretty clear that there was a very pronounced slowdown in the second half of last year, which is still working its way through the economy and will continue to do so in the first quarter," says Suzanne M. Rizzo, U.S. economist for Maria Fiorini Ramirez Inc. With interest rates falling and the possibility of a tax cut, the pause in profits growth may be limited to the first half of 2001. This may not be the start of a recession after all. But compared with what execs are used to, it sure feels like one right now.
By Darnell Little in Chicago, with bureau reports