Earnings Outliers: The Real Deal on Corporate Profitabilityby
As earnings season gets under way, it’s a good time to remember that revenue and profit are not the same thing. Companies may, unsurprisingly, try to spin earnings releases to highlight only part of their story—the part that makes them look the best.
Even among the largest American companies, there are huge differences in profit margins. Some companies, like Apple, operate in high-margin industries, where they can generate big returns with smaller sales. Others, such as Wal-Mart Stores, can bring in half a trillion dollars of revenue and still barely crack the top 10 in profits.
Below are the S&P 100 companies, plotted by their revenues and net income over the last 12 months:
Companies in the same vertical line have similar revenues—for example, JPMorgan Chase, IBM, Citigroup, and Verizon Communications—but with different net incomes.
Companies in the same horizontal line have similar net incomes—such as IBM, General Electric, Berkshire Hathaway, and Wal-Mart—but notice how their revenues are wildly different.
The diagonal line represents an average trend line—about 8 percent net income margins. Companies above the line beat that average, while companies below the line fall short. Notice the names below the line tend to be in older, more mature, lower-margin industries (retail and autos to name two).
Interesting points pop out all over the chart:
• Apple makes slightly more profit than ExxonMobil but does it much more efficiently—with half of Exxon’s revenue.
• Exxon’s margins are barely above the average of these companies.
• Berkshire has Apple’s revenue but Wal-Mart’s net income.
• Pfizer has an amazingly profitable business, with very high profits on relatively low sales.