Waiting Out the Earnings Recession

Profits are mostly up for now, but flat sales could hurt

By now, the verdict is virtually unanimous: The economic recession ended last fall. So the end of the earnings recession can't be far behind. Right? Well, it's not that simple, based on BusinessWeek's flash-profit survey of second-quarter results. Depressed by a $13.1 billion write-off at AT&T (T ) and immense losses at other telecom companies, net income at the 125 businesses in the sample is down 30% from a year earlier, while sales are flat.

Fortunately, the profits picture looks brighter after factoring out telecom. Without the poor performance of just two companies--AT&T and Lucent Technologies Inc. (LU ), which lost $7.9 billion--flash profits would have risen 14%, while sales would have been up 1%.

Indeed, of the 125 companies, fully 84 showed improved earnings over a year ago. Clearly, many are rebounding. General Electric (GE ) and Citigroup (C )--despite its many recent problems--both topped the $4 billion mark in earnings, with profits up 14% and 12% respectively. Philip Morris Cos. (MO ) also boasted a 14% gain, to $2.6 billion, and Microsoft's (MSFT ) income soared to $1.5 billion from just $65 million in 2001, when earnings were swamped by charges. Ford Motor (F ), meantime, swung to a $570 million profit from a $752 million loss, and at General Motors (GM ), net income nearly tripled, to $1.3 billion.

Still, the overall outlook remains quite mixed. Most disturbing is the anemic trend in overall sales, which could hold ominous implications for the recovery. If revenues remain sluggish, further profits gains will have to come through continued cost-cutting and layoffs.

The earnings retreat is not limited to telecom. Falling oil and gas prices battered the five oil companies on the list, resulting in a collective 56% percent decline in profits. Conoco Inc.'s (COC ) 76% drop was the worst. Many tech giants also stumbled. IBM's income plummeted 79%, to $445 million, because of write-offs and an unprecedented slump in its services business. While still profitable, Big Pharma also slipped, hurt by new competition from generic drugs and delays in product launches. Bristol-Myers Squibb Co. (BMY ) said its net plunged 60%, to $440 million, as sales slid 14%.

Airlines also continued to lose a bundle. For the top eight carriers reporting so far, losses were a combined $1.4 billion, with only Southwest Airlines Co. (LUV ) scoring a profit.

What's more, many businesses warn that a turnaround may be far off. "It's a confidence issue out there right now as to when the economy is going to turn," notes James W. Anderson, investor relations director at Caterpillar Inc. (CAT ), which said its second-quarter earnings fell 26%, to $200 million.

Of course, flash profits are an early read: The picture can change once all companies report. Analysts polled by Thomson Financial/First Call still predict that profits will climb 14% in the third quarter and 26% in the fourth, although that estimate has already been scaled back and is likely to be trimmed further. With the economy still wavering and accounting questions still hanging over many corporate reports, the question of whether the long-awaited profits recovery has arrived remains open.

By Michael Arndt in Chicago and Frederick F. Jespersen in New York

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