U.S. corporate profits up 9 percent
By Cesca Antonelli
Bloomberg News Service
NEW YORK — U.S. corporate profits rose 9 percent in the second quarter, the first increase after five quarterly declines, as consumers bought household goods and cars and businesses lowered costs.
A change in the way corporations account for acquisition-related costs also lifted results. Investors and analysts predict more earnings gains in the second half unless new disclosures of accounting fraud or other corporate misdeeds hurt the economy.
"The economy continues to show signs of strength," said Jim Grefenstette, whose Federated Investors Inc. manages $193 billion. "That should be enough for the market to do well, if it weren't for accounting and general integrity problems."
The second-quarter increase is based on results of the 371 companies in the Standard & Poor's 500 Index that reported as of yesterday. General Electric Co., Microsoft Corp. and Pfizer Inc. reported higher earnings as the U.S. economy recovers from a recession.
Profits would have risen 1 percent after adjusting for that accounting change, according to a Thomson First Call estimate.
Earnings fell each of the previous five quarters, the longest stretch since 1969-1970. Companies responded by firing workers, shutting plants, canceling travel plans and renting out extra office space. Investors said those cutbacks are paying off.
"Companies have been aggressively cutting costs, and there has been a modest turnaround in sales," said Rod Smyth, chief investment strategist at Wachovia Securities Inc.
Analysts predict a 14 percent rise in profits this quarter and a 26 percent increase in the fourth quarter, according to a First Call survey.
The S&P 500 stocks trade at about 30 times earnings. Some investors said the figure falls to 16 excluding some costs, about the same as historical averages.
Corporate scandals and accounting frauds at WorldCom Inc., Enron Corp. and other companies considered bellwethers for their industries have pushed stocks lower. The S&P 500 fell 14 percent in the quarter, while the Nasdaq Composite Index dropped 21 percent. The Dow Jones Industrial Average declined 11 percent.
Improving earnings may now be easing investor fears. The S&P 500 has risen 6.9 percent since Tuesday.
"If you can remove your mind from the corporate bashing of the day and focus on fundamentals, stocks are cheap," said Robert Phillips, who helps oversee $800 million at Walnut Asset Management.
Jet engines, cars, toothpaste
General Electric, which makes products ranging from jet engines to light bulbs, said second-quarter net income rose 14 percent to $4.43 billion. Sales gained 4 percent to $33.21 billion.
Colgate-Palmolive Co.'s net income rose to $327 million. Sales at the world's largest toothpaste maker rose 2.6 percent, the fastest pace in more than four years.
General Motors Corp.'s earnings more than doubled as the biggest automaker used discounts to boost sales and gained market share in trucks, which are more profitable than cars. Net income rose to $1.29 billion, and sales increased 4.4 percent to $48.3 billion.
Drugmaker Pfizer said net income rose 7 percent to $1.96 billion. Revenue rose 5.4 percent to $8.03 billion.
Citigroup Inc., the biggest financial-services company, said net income rose 15 percent to $4.08 billion as consumer-banking profit surged to a record.
Corporate spending
Companies that depend on corporate spending are still struggling. Customers halted purchases of big-ticket items such as computers, software and networking gear.
"Businesses are not spending," Wachovia's Smyth said. "Areas connected to business spending are not seeing the same kind of turnaround."
Motorola Inc., the No. 2 maker of mobile phones, said its net loss widened to $2.32 billion, the largest in company history, on costs for job cuts and writing down asset values. Sales fell 10 percent to $6.74 billion.
International Business Machines Corp., the biggest computer maker, said profit from continuing operations sank to $445 million. Revenue slipped 5.7 percent to $19.7 billion, and executives said sales won't pick up as much as expected in the second half.
Delta Air Lines Inc., Northwest Airlines Corp. and US Airways Group Inc. had wider losses. Business passengers, who pay more for tickets bought just before traveling, have been slow to resume flying after Sept. 11.
Lowering targets
Analysts don't expect a resurgence in corporate spending in the next five months. Investors said they are concerned that a new round of corporate and financial scandals will rattle consumers.
"The big unknown is whether recent weakness in the stock market will translate into shattered consumer confidence," said Tom Angers, whose Glenmede Trust Co. manages $14 billion.
More companies are telling analysts to lower forecasts for this quarter, according to First Call. For each company that raised third-quarter estimates as it reported second-quarter results, 2.2 companies lowered them. That ratio was 1-to-1.3 in the first quarter and 1-to-1.6 in the fourth quarter.
That has some investors figuring their holdings will have little or no gains until next year.
"No matter what happens, earnings are going to grow in the second half," said Louis Kokernak, whose Haven Financial Advisors helps wealthy individuals decide how to invest. "The thing is, they're down from such a large base. Even a moderate increase is not going to be enough to stimulate the market to rally much."
