Profit Margin Focus

We are about a week into Q1 earnings season, and outlining the trends we’re seeing seems timely. The feeling is 2012 will likely be a year of still positive economic growth as well as positive, yet slowing, earnings growth.

Wall Street analysts, usually a somewhat optimistic bunch, have been tempering down their expectations for almost a year now. The culprits to the decreased expectations are many. The most obvious are increased costs, and the one in the headlines currently is energy. Industry uses a lot of energy to run factories and distribute goods, and those costs have gone up. When costs go up, all else equal, profits go down.

Other costs are also beginning to creep up. Labor, is also getting more expensive. After the largest lay-off spree in generations, the employment situation now looks to be improving, and with that comes higher wages. According to the Bureau of Labor Statistics, the most recent reading of non-farm unit labor costs showed growth of over 3%.

The other side of profitability is revenue. Revenue growth has been slowing, yet it remains positive. After growing by double digits for much of 2011, single digit revenue growth is expected for 2012. The biggest concern among analysts is pricing pressure. Will companies continue to be able to get top dollar for their wares, or will competition heat up and cause price wars? While good for the consumer, pricing cuts are a drag on revenue. This will continue to be something to watch.

So how are companies doing so far? Pretty well. While we are very early in the reporting season-only 32 of the 500 S&P stocks had reported as of Friday’s closing bell-about three quarters of companies have beaten estimates on earnings and over 80% beat on revenue.

Looking past Q1, it will be very interesting to see how profits and revenues progress. It will be equally interesting to see if a better than expected Q1 earnings season will lead analysts to ramp up their expectations for future quarters.


Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®