In recent years, corporate profit reports were mostly gloomy affairs: The weak economy decimated operating profits at many companies even as tougher accounting rules and massive restructurings forced many companies to take huge write-offs. Now, those dark days look like distant history. Thanks to the falling dollar, a spark from the Bush tax cuts, a big burst of mortgage refinancing in the spring, and a general strengthening in economic activity, third-quarter earnings have investors dancing in the aisles.
BusinessWeek's flash report from 115 early-filing companies shows that third-quarter income from continuing operations, before extraordinary items, rose 33% on a 5% sales increase, over the same quarter last year. Similarly, Thomson Financial/First Call expects a 21% jump in profits and a sales increase of 6% for the companies in the Standard & Poor's (MHP ) 500-stock index. "We're coming back from the depths," says S&P chief economist David Wyss. "The fourth quarter is going to look just as good."
Although profits have been marching higher for the past five quarters, they're on a tear now. The reason: continued cost cutting coupled with ongoing productivity gains are enabling many companies to drop a bigger portion of every new sales dollar straight to the bottom line. At the same time, the falling dollar is giving a lift to profits of the beleaguered manufacturing sector. And having used the Fed rate cuts to clean up their balance sheets, companies are beginning to borrow again.
Those trends boosted profits among lenders such as Citigroup (C ), which reported a 27% rise in operating earnings. Another key: the decline in problem loans, which allowed it to reduce provisions for credit losses by 40%, to $1.6 billion. "We're seeing the benefits of an improved credit environment," says Citi's Chief Financial Officer, Todd S. Thomson.
Can companies keep up the frothy profit gains? Some tech players such as Intel Corp. (INTC ), whose profits more than doubled in the third quarter, should continue to benefit greatly from strong demand for laptops and other equipment as consumers and businesses upgrade. But the reticence of companies to commit to large-scale capital investment is creating headaches for companies such as IBM Corp. (IBM ), which counts on corporate buyers for its high-price mainframes and servers. with third-quarter operating profits up a mere 5%, to $1.8 billion, IBM Chairman and CEO Samuel J. Palmisano cautioned that it was "too early to say that a rebound is at hand."
Given these crosswinds, Thomson Financial/First Call expects profit growth to slow by half, to a more sustainable 12% pace for the S&P companies, in the first two quarters of 2004. Still, that's pretty good, and certainly strong enough to keep shareholders from singing the blues.
By Dean Foust in Atlanta