It’s time for “lean and mean” to show its stuff.
With interest rates rising and many high-income individuals about to confront the higher taxes imposed last year, corporate earning power driven by sales and productivity will have to step up to the plate to keep the decade-old stock market rally going.
Judging by the Tribune’s Top 100 list of the largest Chicago-area public companies, significant earnings momentum developed in the second half of the year. Earnings from continuing operations in the fourth quarter rose 88 percent, to $4.69 billion from $2.50 billion a year earlier.
The fourth-quarter gain nearly matches a 90 percent jump in the third quarter.
Overall, companies tracked by Zacks Investment Research in Chicago posted a 25 percent increase in profits for the three months ended Dec. 31.
The so-called information superhighway is proving to be the road to riches for many Chicago-area companies. For example, Schaumburg-based Motorola scored an 88 percent gain in fourth-quarter profits; General Instrument of Chicago multiplied its profits by a factor of more than six; Lisle-based Tellabs saw the latest quarter’s profits climb 56 percent.
Big-time contributors to last quarter’s earnings gain in the Top 100 were the turnaround at Sears, Roebuck, continued profitability of the area’s major banking companies and a sharply reduced quarterly loss at UAL.
Detracting from an otherwise upbeat quarter were problems at environmental companies WMX Technologies and Safety-Kleen, major litigation costs and other expenses at Baxter International and sharply lower profits at Commonwealth Edison.
Benjamin Zacks, executive vice president of Zacks Investment Research, said Wall Street expects corporate profits to climb about 17 percent in 1994, compared with 25 percent for 1993. Many companies that performed well last year have, in effect, raised the bar for year-over-year percentage gains.
It remains to be seen, for example, whether banking firms can continue their stellar earnings performance in the wake of higher interest rates. Traditionally, higher interest rates were bad news for bank stocks.
But today, bank profits derive from securities trading, venture capital profits and fees for a host of financial servies. As a result, banks are less dependent on the ebb and flow of interest rates.
Similarly, high-technology growth companies such as Motorola may be able to prosper in a less-generous interest-rate environment. Multinational companies of the Motorola scale are more dependent on technological innovation and their ability to penetrate new markets at home and abroad.
Another uncertainty for many companies will be their ability to enforce price increases in response to strong demand. Most manufacturing companies doing well these days are posting higher percentage gains in profits than in sales. The phenomenon, which has characterized the last several years, reflects the impact of cost-cutting and lower interest rates.
For example, Idex, a Northbrook-based maker of fluid-handling equipment, saw fourth-quarter profit advance 44 percent, while sales rose just 6 percent. These results are typical of many Heartland industrial companies.
Analysts believe many basic industries, such as steel, will be able to make price increases stick this year. Sales by Inland’s steel division rose 22 percent in the fourth quarter, while net tons of steel shipped rose 9 percent and capacity utilization declined to 74 percent from 83 percent a year earlier.
Reflecting the generally bullish outlook for the U.S. economy in 1994, Chicago-based truckmaker Navistar boosted its 1994 forecast for North American heavy-truck industry demand to 185,000 units from an earlier estimate of 160,000. Last year the industry sold 116,400 trucks in North America.
Wall Street often interprets such upbeat business prospects as a reason to sell. But Navistar stock gained 75 cents, to $26 a share, Thursday after releasing its latest quarterly results and forecast. The stock was swept up in the general sell-off Friday and gave back the 75-cent gain.
Despite the fear of higher interest rates that spooked the markets last week, Wall Street will reward companies that have boosted productivity and profit margins if they can generate new sales and penetrate new markets.
