Earnings: Sound and Fury, and Not Much Else

Higher third-quarter profits don't hold up under scrutiny

When something looks too good to be true, it probably is. Case in point: the 55% surge in third-quarter net profits, on a 1% sales gain, reported by the 85 companies in BusinessWeek's quarterly flash-profits survey. While corporate earnings are improving, there's unfortunately less to these numbers than meets the eye. Take out special charges, and income from continuing operations was flat compared with the previous year. Why the big difference?

For starters, the third quarter of 2001 was one of the worst in recent memory. On top of recession and damage from September 11, many companies took huge write-offs that sent third-quarter profits tumbling 55%. From such a low base, the only way was up. Although many companies also took write-offs this year, the sheer magnitude was much greater in 2001. So exclude such extraordinary items from both this year's numbers and last, and the seemingly strong profit growth disappears.

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