In the Wall Street Journal of March 3-4, there was a notable article titled “Playing the Profit Wave.” The article discusses various aspects of corporate profitability, foremost among them whether profit margins are peaking.
I believe that this subject is of great importance currently, and many facets deserve greater recognition; especially, the lagging growth in sales growth, which is mentioned in the article (and excerpted below) and is subject that I have mentioned in numerous blog posts.
As seen in the article, corporate profit margins have, over recent quarters, been very high. In fact, one source recently said that corporate profit margins are at 57-year highs.
Here are a few excerpts from the article that I find most important:
“We’re already at or above previous highs in most sectors,” says Ed Yardeni, president of Yardeni Research, an investment advisory firm in Brookville, N.Y. “There are plenty of signs that profit margins will flatten or go down this year and next year.”
So far, companies in the Standard & Poor’s 500-stock index have reported operating profit margins—which show how much a company earns for each dollar of sales before interest and taxes—of 8.66% for 2011’s fourth quarter, down 0.85 percentage point from the previous quarter.
Widening margins have been a key driver of earnings growth since the market bottom in 2009. Though earnings in the S&P 500 have grown 71% since the second quarter of 2009, revenues have grown only 22%, according to S&P. Instead, companies have pried productivity out of employees and implemented cost-savings measures.
Even with last quarter’s drop, today’s 8.66% operating margins are still well above the 7.19% average since 1992.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1369.63 as this post is written