America’s big companies have managed to generate healthy profit growth despite weak revenue growth. They have been pulling this off by improving operational efficiencies, which often means laying off workers and getting more out of the workers who stick around.
This story has been captured neatly by widening profit margins.
According to data from FactSet, Q3 earnings per share grew at a 5.6% rate while revenue climbed by just 3.7%. It’s the same old story.
Margins are already near record highs. But analysts expect they will actually go higher from here. Here’s more from FactSet:
…For Q4 2014, Q1 2015, and Q2 2015, analysts are predicting earnings growth rates of 6.0%, 7.8%, and 9.0%, respectively. For all of 2014, the projected earnings growth rate is 6.1%. For all of 2015, the projected earnings growth rate is 10.5%.
…For Q4 2014, Q1 2015, and Q2 2015, analysts are predicting revenue growth rates of 2.8%, 3.5%, and 2.9%. For all of 2014, the projected revenue growth rate is 3.7%. For all of 2015, the projected revenue growth rate is 3.7%.
Given this divergence in expected earnings and revenue growth over the next few quarters, analysts are expecting profit margins to continue to expand into 2015. Using the bottom-up sales-per-share (SPS) and earnings-per-share (EPS) estimates for the S&P 500 as proxies for expected sales and earnings for the index over the next few quarters, profit margin estimates can be calculated by dividing the expected EPS by the expected SPS for each quarter. Using this methodology, the estimated net profit margins for Q4 2014, Q1 2015, and Q2 2015 are 10.3%, 10.4%, and 10.7%. These numbers are above the blended net profit margin for Q3 2014 (9.9%), and are also well above the average net profit margin of 9.3% recorded over the past four years.
Corporations can’t keep squeezing incremental amounts of production from their assets into perpetuity. At some point, something’s gotta give.
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