Blue-Chip Earnings Leap in 2003

U.S. corporate earnings led by companies including Merrill Lynch & Co., Intel Corp. and ChevronTexaco Corp. more than doubled to a record in 2003, buoyed by greater consumer spending, job reductions and a weakening dollar.

Companies in the Standard & Poor’s 500 index had net income of $474 billion for the year, based on a Thomson Financial estimate that fourth-quarter profits rose 22%.

That would surpass the $445 billion in net income reported for the blue-chip S&P; 500 firms in 2000, the year before the U.S. economy slid into recession.

Profit for the S&P; 500 companies totaled $179 billion in 2002.

More than 2.4 million job cuts since March 2001 have helped keep corporate costs down. As demand for cars, electronics and other products rose in 2003, the added sales translated into extraordinary earnings growth for many companies.

U.S. companies may hire and invest more this year if the economy continues to expand, said George Mairs, who manages $2 billion at Mairs & Power Inc. in St. Paul, Minn.

“What 2003 proved is that the underlying growth of the U.S. economy continues to be impressive,” Mairs said. “After a couple of disappointing years, that growth reasserted itself. Virtually everybody will benefit from this.”

The S&P; 500 stock index rose 26.4% in 2003, buoyed by underlying earnings. Bill Miller, whose Legg Mason Value Trust stock mutual fund has outperformed the index an industry-best 13 straight years, predicted it would rise 20% or more in 2004 as earnings continue to grow.

“If you were to ask me if I would be more surprised if the S&P; was up 10% or 30%, I’d say 10%,” said Miller, who manages $13 billion in Baltimore.

Wall Street firms led last year’s profit gains. The 12 New York Stock Exchange-listed brokerages are expected to have earned $22.5 billion in 2003, helped by higher trading income, according to the Securities Industry Assn.

Merrill Lynch, the biggest securities firm by capital, had its second-highest quarterly profit in the third quarter, and profit in the fourth quarter is forecast to rise more than 50%, according to the average estimate of analysts in a Thomson survey.

Tax cuts and the lowest interest rates in 45 years made it easier for consumers to borrow and spend last year, benefiting many retailers and computer-related companies.

Department store chain Nordstrom Inc. forecast in October that profit in the fourth quarter would exceed analysts’ estimates. Profit at Neiman Marcus Group Inc., an upscale department store chain, doubled in its fiscal first quarter ended Nov. 1 as sales rose 12%. Shares of both companies rose more than 70% last year.

Intel, the biggest maker of computer chips, said recently that fourth-quarter sales would reach the high end of its forecast. Texas Instruments Inc., the biggest maker of chips for cellular telephones, said sales in the quarter would be the highest in three years.

The chip companies, whose shares gained more than 90% last year, have cut more than 7,000 jobs each since 2000, when the tech sector peaked.

“It’s a sweet spot for [corporate] profit that is very rare,” said Jeff Kleintop, who owns Intel and Texas Instruments shares at PNC Financial Services in Philadelphia, which oversees $51 billion in assets. “They had revenues going up and costs going down -- no hiring, no discretionary capital spending, no inventory building.”

Low interest rates helped banks and homebuilders.

Bank of America Corp., the third-largest U.S. bank by assets, reported record net income of $2.92 billion in the third quarter and is forecast to have a fourth-quarter profit gain of about 30%, according to Thomson.

Lennar Corp., the largest U.S. home builder by stock market value, said earnings for the fiscal fourth quarter ended Nov. 30 climbed 26% as low mortgage rates helped the company sell more than 10,000 homes.

The dollar has plunged to record lows against the euro in recent months and also has fallen sharply against other currencies, bolstering earnings of U.S. exporters when they convert overseas sales to dollars.

3M, the maker of Scotch tape and thousands of other products, said currency gains accounted for two-fifths of an 18% increase in third-quarter international sales. The St. Paul, Minn.-based company raised its 2003 profit forecast because of the higher sales and lower costs. 3M has cut 8,500 jobs since 2001.

Eastman Kodak Co., the world’s largest maker of film, said sales would have dropped 1% instead of rising 2.8% in the third quarter without the benefit of a weaker dollar.

Higher energy prices have underpinned the earnings of oil companies such as ChevronTexaco, which reported its biggest profit since the 2001 merger that created the company.

ChevronTexaco’s third-quarter net income was $1.98 billion, contrasted with a loss of $904 million a year earlier. Fourth-quarter earnings may rise almost 60%, according to analysts’ estimates.

Some companies are lowering their reluctance to hire and invest after a slowdown in corporate spending helped send the United States into recession beginning in the first quarter of 2001.

IBM Corp., the world’s biggest computer maker, said in October that it would add 10,000 jobs this year. The economy has “stabilized,” Chief Executive Sam Palmisano told investors.

America West Airlines, the eighth-largest U.S. carrier, said Dec. 26 that it planned to hire 1,000, expanding its workforce for the first time since the Sept. 11 terrorist attacks.

“What we’re looking at coming up is a long period of steady job creation,” Carl Camden, CEO of Kelly Services Inc., the second-largest U.S. temporary employment agency, said recently.

United Parcel Service Inc., the world’s largest delivery company, has said it will spend $2.2 billion this year on aircraft and other equipment. Gap Inc. plans to set aside $500 million, almost double the 2003 amount, so the largest U.S. clothing retailer can open and remodel stores.

Higher capital spending will squeeze many companies’ profit margins this year, Kleintop said.

The consumer-spending surge that sustained the economy the last three years also may be fading, said Kevin Bannon, chief investment officer of Bank of New York Co., which manages $76 billion in New York.

Still, S&P; 500 company operating earnings (results before one-time gains and losses) are projected to rise about 13% this year, according to analyst forecasts compiled by Thomson.

Results are expected to be paced by sharp profit growth in the basic materials, technology and transportation sectors as the economy continues to grow.

Weaker earnings growth is projected for sectors including energy and financial services.