Another Glittering Quarter For Profits
Still harboring doubts about the strength of the economic recovery? Well, it looks like you can put them to rest. Broad-based demand, a weak dollar that is boosting exports, and an improving job scene have combined to fuel a surge in corporate profits.
Check out the first-quarter numbers. BusinessWeek's flash profit survey of 120 early filing companies shows that income from continuing operations before extraordinary items surged 22%, while revenues rose 12%. That's the second consecutive quarter of double-digit leaps in both measures. While those figures could be revised downward as more companies report, any changes aren't likely to be big. Analysts surveyed by Thomson First Call (TOC ) project that their measure for first-quarter income from continuing operations for the companies in the Standard & Poor's (MHP ) 500-stock index -- which excludes special items in addition to extraordinary items -- will climb 20.5%, on sales gains of 9%. "It's a stable, global recovery," says Joe Cooper, analyst at Thomson First Call.
Information technology and finance were the quarter's stars. Earnings doubled for tech overall, largely based on knock-out-the-lights results for chipmakers. Intel Corp. (INTC ) led the pack with an 89% jump in profits, to $1.7 billion. Robust demand for processors and memory chips for computers, games, and other gadgets kept Advanced Micro Devices Inc. (AMD ) and National Semiconductor Corp. (NSM ) in the black after losses a year ago. Earnings at Apple Computer Inc. (AAPL ), tripled on a 29% increase in revenues, driven in part by its iPod music player. Although IBM (IBM ) was a relative laggard, it still posted 16% earnings growth on an 11% revenue increase.
Financial institutions have been benefiting from decent interest-rate spreads on loans, but they're also seeing a pickup in fee-based businesses. Goldman Sachs & Co. (GS ) was a big winner, with earnings up 95%, on a 30% rise in revenue. Merrill Lynch (MER ), Lehman Brothers (LEH ), and Citigroup (C ) also posted heady gains. "[Financials] tend to benefit from a stronger economy, better credit quality, and higher consumer spending," says Ed Keon, chief quantitative strategist for Prudential Equity Group LLC.
U.S. auto makers are beginning to benefit as well. Ford Motor Co. (F ) doubled profits from the year-ago level, while sales rose 9%. A better mix of high-profit trucks and SUVs, along with stronger pricing, contributed to the revenue uptick. General Motors Corp. (GM ) didn't fare as well. Profits dropped 17% on a 1% sales increase. But strip out the gain in last year's numbers from the sale of the Hughes Electronics unit, and GM's earnings rose 24%.
While the weak dollar has been helping companies with strong overseas sales, many would have posted big jumps without this boost. Take away gains due to currency, and Keon says earnings could rise up to 12% this year. That's big since earnings tend to grow at the rate of gross domestic product over time. For now, it's good enough to quash fears of a false recovery.
By Faith Arner in Boston, with Kathleen Kerwin in Detroit