Record profits expected, despite market funk

The Insider

Your Money

March 27, 2005|By BILL BARNHART

You wouldn't know it by following the stock market's latest funk, but corporate America has rarely been in better shape.

Another embarrassment of riches lies ahead as companies close the books on the first quarter of 2005. The biggest question is what to do with the money.

Chances are good that analysts, once again, have low-balled the pace of profit growth.

"I wouldn't be surprised if there is a surprise," said Michael Thompson, director of research at Thomson Financial.

His firm officially estimates that earnings per share of the Standard & Poor's 500 companies grew at 7.8 percent in the current quarter, down from a 20 percent growth rate for the fourth quarter.

"I wouldn't be surprised to see earnings growth for the quarter somewhere north of 10 percent," Thompson said.

Curmudgeonly market analyst Steven C. Leuthold of the Leuthold Group in Minneapolis predicted in his March report a 15 percent growth rate for S&P 500 profits in the first three months.

Even with the travails of automakers General Motors and Ford, overall corporate profits seem likely to remain at record-high levels at least through the first quarter.

The good news extends beyond conventional accounting data, usually reported as earnings per share.

On the basis of cash generation, an increasingly important factor for stock analysis, most major sectors of stocks are turning in impressive results and indicating upbeat outlooks, despite the threats of higher interest rates and raw material costs.

Analysis by the Applied Finance Group indicates strong cash generation - above the cost of financing the businesses - in all but a few industry sectors.

Not surprisingly, energy and mining stocks are leading the pack in generating cash. The underdog is health care, which has lagged for at least a year.

Aside from energy, cash generation has strengthened the most in financial services, utilities and transportation since the monthly data were first published in July.

Large-cap companies, which have been out of favor relative to small-cap stocks, appear to be pulling ahead, said Applied Finance founder Rafael Resendes.

In short, it looks as if corporate America has at least one more quarter of strong results in the bag.

Looking forward, "we've been saying for some time that profit margins have gotten to a point where it doesn't get much better than this," said Eric Bjorgen, an analyst at Leuthold Group.

"Sooner or later, you're going to see pockets of commodity inflation and finally a resurgence of wage inflation that could eat into profit margins in the second half of the year."

His firm has trimmed its estimate of 2005 profit growth for the S&P 500 companies to 8 percent from 10 percent, down from 20 percent last year. Thomson Financial estimates 10.6 percent growth in 2005.

Stock market trends typically look forward, at least six months. The inability of stock prices to gain upward traction so far this year signals a weakening profit and cash flow picture by the end of the year.

But for now, "companies are in great financial condition," said Thompson.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. Readers may send e-mail to him at yourmoneytrib

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