Corporate profits continue to slide

John W. Schoen Senior producer • Profile • E-mail

Sometimes “not so bad” is good enough.

That’s the way investors seem to be reacting to the lasted round of recession-battered corporate profits. With results now in from some three-quarters of the companies in Standard & Poor's 500 index, first quarter earnings reports have generally been better than analysts’ sharply marked-down forecasts.

The stock market has taken all of this as another “green shoot” of optimism, shoring up a rally that market bulls are taking as a sign of a bottom.

But a closer look at the numbers indicates that the investors’ profit enthusiasm may be premature. While about half of companies beat forecasts, those profits were still well below last year’s already weak performance. Overall, profits are down 36 percent from the first quarter of 2008, according to S&P.

That’s the seventh straight down quarter and the worse record since 1998.

That’s not as bad as the 63 percent profit plunge in the fourth quarter of salt year. With the economy slogging through the worst recession in decades, companies and analysts scaled back forecasts accordingly. Some market watchers think the bar was set so low, it shouldn’t come as a surprise that hundreds of companies managed to jump over it.

“I haven’t seen anyone who is impressed with earnings,” said Steve Grasso, a trader with Stuart Freeman at the New York Stock Exchange. “They’re more interested in how low the expectations were.”

The initial enthusiasm over profit improvements was also dampened by a closer look at where they came from. To slow the slide in profits, companies have slashed costs largely by shedding workers and cutting back hours for those still on the payroll.

Last week, the Labor Department reported that its Employment Cost Index, a broad measure of wages and benefits, bumped up by just 0.3 percent in the first quarter. That was the weakest gain since records began in June 1982. Cuts in worker benefits, including pensions, also helped bolstered profits; the Labor Dept reported that benefit costs rose by just 0.5 percent.

But with consumers still hunkered down, sales continued to fall. Overall, companies in the S&P 500 have posted a 12.5 drop in revenues compared to a year ago — just 89 of the 341 reporting by the end of last week posted a gain in sales.

“You cannot drive sustainable growth by cutting costs,” said James Bevan, chief investment officer at of CCLA Investment Management, “You need to see stronger revenue growth to drive long-term growth because cost cutting delivers a one-off change upwards in profitability, but not a sustainable uplift.”

One of the brightest corners of the profit picture came from the nation’s battered banks, which are still reeling huge losses in real estate loans and bad investments backed by mortgages.

After reported record losses in the fourth quarter, some of the most troubled players surprised Wall Street buy posting profits, including Bank of American and Wells Fargo. Citibank, one of the weakest of the big banks on government life support, logged a smaller loss than expected.

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