Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Semi-Equips - Buy when BLOOD is running in the streets! -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (6711)	8/18/1998 10:18:00 AM
From: Robert Douglas	Read Replies (2) \| Respond to of 10921

OT Treatise on profit margins. Caution boring material! Just curious, but what is the average profit margin of the S&P 500 companies and what is its long term sustainable profit margin For starters the S&P 500 is a bad place to look because it has all those financial corporations in it which foul up numbers on return on sales. In my earlier post I was quoting numbers compiled by the Dept. of Commerce which if you want to follow along are in the "Survey of Current Business" page D-48. I'm sure everyone subscribes. <G> This series on profit margins measures corporate profits for non-financial corporations per unit of revenue since 1959. During this period of nearly 40 years the profit margin has tended to be between 6 and 8 percent. The 5 times that it dipped below 6% were the last 5 recessions, including the 90-91 recession. The two times it has risen above the 8% level were the extraordinary period between 1961 and 1969 and since 1994. The present level is around 10% and is the highest since 1967. What is a sustainable level? I guess to answer that you have to ask if the factors that have led to the high margins are long lasting. The two periods of high margins have a number of similarities. Each had high growth, low inflation and wage growth lagged behind. This last factor is critical for profit margins since labor makes up two thirds of all business costs. In the sixties labor contracts didn't contain cost of living adjustments and so wages were slow to adjust to the prosperity of the times. In the nineties, labor has been weak mostly due to intense competition. Will wage demands stay low in this period of low unemployment? This is a critical question. I believe the numbers on employment costs indicate they will not. (http://stats.bls.gov/ecthome.htm) At least not to the degree that margins will remain at this level. Therefore I must conclude that profit margins will face downward pressure from here. How far they decline is hard to say, but even a drop to 9% would bring profits down 10% given the same revenue level. Sorry if this is a boring subject matter, but I really believe this will be the critical determinant for the stock market. -Robert