Profit margins are still getting wider.
“With earnings growth (6.7%) rising at a faster rate than revenue growth (3.1%) in Q2 and in future quarters, companies have continued to discuss cost-cutting initiatives to maintain earnings growth rates and profit margins,” said FactSet’s John Butters on Friday.
This comes at a time when profit margins are already at historic highs.
Ever since the financial crisis, sales growth has been weak. However, corporations have been able to deliver robust earnings growth by fattening profit margins. Much of this has been done by laying off workers and squeezing more productivity out of those on the payroll.
Stock market bears have warned that these margins are doomed to revert, leading to a correction in profits and stock prices.
For now, all signs point to continued margin growth.
“[T]he majority of earnings growth we have observed so far this quarter has been a function of margins, as companies continue to operate with as few expenses as possible,” wrote analysts at JP Morgan Asset management.
Here’s Butters’ margin chart:
Butters’ note include these anecdotes from this season’s earnings conference calls.
“The first step to building the right organisation for our ambitions is to realign our workforce. With this in mind, we will begin to reduce the size of our overall workforce by up to 18,000 jobs in the next year.” — Microsoft (Jul. 15)
“Alcoa continues to drive strong performance across all businesses, delivering $US302 million in second quarter productivity gains across all segments and $US556 million in year-over-year productivity gains in the first half of 2014 against an $US850 million annual target. Productivity gains have been driven by process improvements and procurement savings across all businesses.” — Alcoa (Jul. 8)
Among the early reporters, companies in food-oriented industries in particular have highlighted cost cutting measures. For more information on food cost inflation, please see our latest FactSet Economic Insight report at the following link: http://www.factset.com/insight/2014/7/econ-insight-food-inflation
“Cost savings from the company’s CCI program and the impact of higher-margin industrial products improved gross profit margin, which rose to 39.9% from 39.3% in the year-ago period.” — McCormick & Co. (Jun. 26)
“Our Consumer Foods supply chain cost reduction programs continue to yield good results, and delivered cost savings of approximately $US50 million for the quarter.” — ConAgra Foods (Jun. 26)
“In addition, supply chain cost-savings from our ongoing Holistic Margin Management (HMM) program are expected to exceed $US400 million in 2015. We anticipate these savings will offset input cost inflation, which we estimate at 3 per cent for the new year.” — General Mills (Jun. 25)
“We remain focused on cost discipline to offset the negative effects of our gross profit dollar growth. We will be accelerating our optimization efforts, taking additional steps to lower our expenses company- wide.” — Walgreen (Jun. 24)
“We’ve continued to achieve a more cost-effective platform. Transformative changes that we’ve talked about the past in Darden’s operations have significantly reduced costs by over $US150 million annually in selected operating areas around support including supply chain, facilities management, water and energy usage.” — Darden Restaurants (Jun. 20)
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