Firms’ Profits Keep Rising

Corporate America’s earnings growth streak continued in the third quarter as companies overall racked up another period of double-digit gains, new data show.

As expected, energy companies posted the biggest year-over-year growth, thanks to the surge in oil and natural gas prices for much of the quarter.

But results also were strong for many industrial and technology companies -- a sign of the economy’s underlying health, some analysts say. Those sectors also are expected to show robust earnings growth in 2006.

The weak link in the earnings chain: the so-called consumer discretionary sector, which includes automakers. Auto companies’ bottom line has been hammered as energy prices have hit sales of highly profitable larger vehicles.

With nearly all of the companies in the blue-chip Standard & Poor’s 500 index now having reported their earnings for the quarter ended Sept. 30, the overall growth rate was 11.5% from a year earlier, S&P; said this week.

That marked the 14th straight quarter of double-digit gains, an unprecedented streak, said Howard Silverblatt, who compiles S&P;’s earnings data.

Excluding the energy sector’s huge gain, S&P; 500 earnings were up 9.6% in the quarter.

The growth figures are for operating earnings, the results before one-time gains or losses.

Companies have reaped record earnings in the economic expansion since 2002 as sales have risen while managements have focused intently on keeping costs down, including by limiting hiring.

“What companies have done is they’ve been able to squeeze costs [and] they have great productivity,” Silverblatt said.

Although the year-over-year growth rate in earnings has declined from 31% in the second quarter of 2004, the surprise is that results still are rising at a double-digit pace, many experts say. The growth rate was 13.4% in the first quarter of this year and 14.4% in the second quarter, even as rising interest rates and soaring energy prices added to many companies’ costs.

Offsetting those expenses, the corporate bottom line has been fattened this year by faster-than-expected economic growth -- which has meant higher sales -- and by a “slower-than-expected acceleration in labor compensation,” said Andrew Tilton, an economist at brokerage Goldman, Sachs & Co.

In the energy sector of the S&P; 500, which includes Exxon Mobil Corp. and Chevron Corp., third-quarter earnings were up 49.4% from a year earlier, S&P; data show. The firm’s estimate for fourth-quarter growth is 56.4%.

But the energy sector’s growth rate in 2006 is expected to fall to 8.1%, according to S&P;’s estimates. Many analysts are betting that oil and natural gas prices will level off or decline further from recent peaks.

By contrast, the industrial and technology sectors are expected to continue posting double-digit profit growth in 2006.

The industrial sector’s earnings rose 23.4% in the third quarter and should rise 14% in 2006, S&P; said. The tech sector’s results were up 19.1% in the latest quarter and are projected to advance 14.7% next year.

Dirk van Dijk, research director at earnings tracker Zacks Investment Research in Chicago, said the story in the industrial and technology businesses was the pickup in capital spending as cash-rich companies upgrade equipment to boost output or raise productivity or both.

“If you’re selling to other companies, you’re doing well,” Van Dijk said. Because industrial equipment is in demand, and worldwide, the producers also may have decent pricing power, he said.

Heavy-machinery maker Caterpillar Inc. is expected to earn $4.75 a share next year, up 21% from an estimated $3.94 a share this year, according to analysts’ consensus estimates as tracked by Zacks. Earnings are expected to benefit in part from Caterpillar’s price increases over the last two years.

By contrast, earnings of many consumer-related companies, including in healthcare, have risen more slowly this year amid heated competition, as firms have had to offer more incentives to get people to spend. Although Wall Street expects earnings of consumer-sector companies to rebound next year, that would be from this year’s depressed levels.

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Growth by sector

Here are third-quarter and 2006 estimated earnings growth rates for major industry sectors in the Standard & Poor’s 500 index:

*--* Year-over-year profit growth: Industry Q3 2006 est. Energy +49.4% +8.1% Industrials +23.4% +14.0% Technology +19.1% +14.7% Utilities +10.0% +15.7% Telecom +6.2% +4.8% Consumer staples +4.1% +6.4% Healthcare +3.3% +12.9% Financials +2.7% +9.2% Materials -2.4% +5.4% Consumer discretionary -9.4% +21.7% S&P; 500 +11.5 +11.5%

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