U.S. Companies' 4th-Qtr Profits Rise 2.5% on Demand for Software, Homes
Bloomberg News
February 5, 1999, 2:53 p.m. ET
U.S. Companies' 4th-Qtr Profits Rise 2.5% as Consumers Spend
New York, Feb. 5 (Bloomberg) -- U.S. corporate fourth-
quarter earnings rose about 2.5 percent, as consumer spending on
software, drugs and new homes helped companies cap a seventh
straight year of rising profits.
Of the 76 percent of the Standard & Poor's 500 Index
companies that have reported, those that rely on U.S. consumers,
such as Microsoft Corp., Intel Corp. and Pfizer Inc., had the
biggest increases in quarterly earnings.
Low prices for commodities ate into earnings at companies
such as Exxon Corp. and International Paper Co., while economic
slumps in Asia and Latin America hurt profits for Coca-Cola Co.
and Caterpillar Inc.
''Consumers continue to spend,'' said Jim Meyer, research
director at Janney Montgomery Scott Inc. ''But if you take
technology and drugs out of the equation, earnings growth is
flat.''
For the year, earnings rose an estimated 3.5 percent, the
smallest amount since profits fell in 1991, when the U.S. economy
spent part of the year in a recession. The annual gain was less
than the historic average rise of 7 percent.
While most companies beat analysts' earnings forecasts, many
had pressed Wall Street to cut estimates as revenue fell from
Asia and Latin America.
Analysts expect S&P 500 earnings to rise about 8 percent in
the first quarter. That's down from estimates of 14.3 percent at
the beginning of the fourth quarter, said Chuck Hill, director of
research at First Call Corp., a New York-based research firm that
tracks analysts' profit forecasts.
By the time companies actually begin reporting, Hill said,
he thinks forecasts will call for a 5 percent gain.
High-Tech Gains
Software and computer-related companies reported strong
fourth-quarter results, rebounding from price cuts, a backlog of
machines on warehouse shelves and slower growth in shipments.
''The technology area is in strong recovery mode,'' Hill
said.
Microsoft's earnings rose 75 percent, powered by sales of
software to consumers buying new home computers and to
businesses. Many companies are rushing to install software before
2000 so they can work on solving computer errors that may occur
after Dec. 31, when computers may have trouble recognizing the
new year.
Intel, the world's biggest computer-chip maker, beat even
its own optimistic forecast for revenue, and had earnings growth
of 18 percent on sales of its expensive Pentium II chips and even-
faster Pentium II Xeon product for sophisticated personal
computers.
Meanwhile, drug companies benefited from strong sales of
pharmaceuticals that either are protected by patents or can't be
easily imitated in generic versions.
Pfizer's profit rose 42 percent on strong sales of the
popular impotence drug Viagra, which it started marketing in
Europe. Warner-Lambert Co.'s profit rose 45 percent, paced by its
cholesterol drug Lipitor and diabetes pill Rezulin.
''Never before was the population as aware of drugs and
their benefits,'' said David Saks, an analyst with Gruntal & Co.
An unexpected lift to U.S. companies came from the housing
industry, as sales of existing and new homes hit all-time highs.
Fed by low unemployment, rising incomes and low mortgage rates --
the 30-year benchmark mortgage rate has been below 7 percent
since June, the longest stretch since the government began
keeping records -- consumers are snapping up bigger and new homes
at a record pace.
New home sales in November were at an annual rate of 1.02
million. In the full year, 888,000 new homes were sold, setting a
record, according to the Commerce Department. The previous record
was 819,000 in 1977.
Home resales rose in December by an annual rate of 5.03
million, the highest monthly pace on record, according to the
National Association of Realtors.
All of that was good news for Pulte Corp., which built more
homes in the U.S. than any other company in 1998. Its profit rose
a better-than-expected 29 percent.
Low interest rates also were a boon for Freddie Mac, the
No. 2 U.S. mortgage financier. Earnings at the government-
established corporation rose 22 percent as consumers hastened to
refinance their mortgages.
Appliance makers and consumer electronics retailers also
benefited from the rise in home sales -- for now, anyway.
Whirlpool Corp.'s profit rose 30 percent, paced by a 10
percent increase in North American sales. The world's biggest
maker of large appliances tempered the good news by warning that
Brazil's economic slump may lead to a first-quarter profit drop.
Meanwhile, Best Buy Co., the largest U.S. consumer-
electronics retailer, said earnings in the period ended Nov. 28
doubled, largely as consumers spent more on digital cameras,
video disc players and cellular telephones.
Trouble for Exporters
The picture was less rosy for companies that sell basic
materials, such as steel, capital goods and processed
commodities. Companies that count on overseas markets were most
vulnerable.
Archer-Daniels-Midland Co., one of the world's largest grain
and oilseed processors, said earnings fell 21 percent because of
slack Asian demand for soybean meal and vegetable oil. Soybean
and corn prices tumbled last year to their lowest levels in
10 1/2 years after two straight years of bumper U.S. harvests.
While low raw material costs often help processors such as
ADM, export sales of most farm products have slumped because of
recessions in Asia.
Oil, Steel
Exxon, the biggest U.S. oil company, said earnings fell 30
percent, the fourth consecutive quarterly decline, as profit from
chemical sales fell and oil prices hovered at historic lows.
Crude oil averaged $12.92 a barrel in the quarter, $7 less than a
year earlier, and the lowest since the benchmark began trading 16
years ago.
Nucor Corp., the No. 2 U.S. steel company, said profit fell
20 percent because of lower prices on flat-rolled steel, a low-
grade metal used in pipe and machinery. The company and other
U.S. steelmakers accuse overseas producers of selling steel at
below-market costs in the U.S.
Similarly, International Paper Co.'s profit fell 43 percent
as shrinking demand in Asia forced paper companies there to flood
the U.S. and Europe with cheaply priced products.
Even Coca-Cola, which prospered during much of the decade
overseas, got hurt in the quarter as earnings at the world's
biggest soft-drink company fell 27 percent.
Supermarkets, Restaurants, Retailers
Companies that sell directly to consumers, especially those
that do most of their business in the U.S., fared much better.
''Consumers are not keen on the slowdown story,'' said Ian
Shepherdson, chief U.S. economist at High Frequency Economics in
Valhalla, New York.
No. 1 U.S. grocer Kroger Co. said profit rose 22 percent,
while at No. 2 Safeway Inc., profit rose 19 percent. Both chains
beat expectations, thanks to cost-cutting efforts and higher
sales.
McDonald's Corp., the world's largest restaurant company,
said earnings rose 8.8 percent, thanks largely to diners in the
U.S. and Europe, where the chain gets about 75 percent of its
sales. That helped overcome lagging demand in Asia, Brazil and
other developing regions.
Wal-Mart Stores Inc., the world's biggest retailer, said
same-store sales in December -- its most crucial month -- rose
9.4 percent. Gap Inc. said sales rose 19 percent. Wal-Mart and
Gap don't report their quarterly earnings until late February.
In December, U.S. retail sales rose 0.9 percent, beating
expectations, Commerce Department figures show. Combining
November and December, sales rose 5.1 percent, the best period
since 1992, when sales rose 5.6 percent in the comparable period.
Meyer, the Janney Montgomery analyst, said he expects sales
to continue to rise at chains that enjoy strong reputations among
shoppers for good value and selection, such as Wal-Mart and Gap.
Consumers ''want something out of the ordinary,'' he said.
--Noam Neusner in Princeton (609) 279-4091/jmg
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