behind corporate profits
One is the falling dollar, the other declining tax rates, analysts say
BY Gretchen Morgenson: The New York Times: March 15, 2004
Profits at U.S. corporations were up smartly last year - 18.4
percent, according to First Call - so why are companies still laying
Outsourcing jobs to India to save costs is one answer. Another
may be that corporate results, when put under a microscope, are not as
fabulous as they seem. In fact, two exogenous factors - lower corporate
tax rates and a weak dollar -are giving a big assist to sales and
profits. Growth from core operations, which typically spurs corporate
hiring, is far lower at some companies than investors may realize.
Start with the falling dollar. As local currencies used to pay
for U.S. goods rise in value against the dollar, those profits look
better, even when sales are flat. Tom Doerflinger, an analyst at UBS,
said such currency translations contributed almost one-quarter of the 9
percent sales growth at Standard & Poor's 500 companies last year.
For some, the weak dollar has been an even bigger gift. The
Ingersoll-Rand Co., an equipment maker, had an 11 percent increase in
revenues in 2003; over one-third was the result of currency
fluctuations. And at Caterpillar Inc., half the 8 percent growth in
machinery sales volume and more than half of the increase in engines
sales volume were currency related.
The Danaher Corp., a tool and component maker, reported 15.5
percent sales growth for 2003. Most was the result of acquisitions, but
4 percentage points came from favorable currency translation. Take away
those factors, and sales grew just 1.5 percent.
Manufacturing companies such as Danaher and Caterpillar make a
useful study because they are precisely the kinds of operations that
should show explosive sales growth when a recovery begins. And their
stocks have shown big gains in the past year as investors took the
companies' results at face value.
Declining tax rates have a similar-ly pleasing effect on
profits. Compa-nies selling goods overseas, for exam-ple, pay the tax
rate of the country where the sales occurred. Foreign taxes are
typically lower than the do-mestic version, so a company's over- all
tax hit goes down as its exports rise.
For instance, Danaher's tax rate fell to 32.6 percent last year
from 34 percent in 2002. Company filings said the rate should decline
to 31.4 percent in 2004.
Last year's tax rates are not yet available for all companies,
but in 2002, the effect of foreign sales was great at some. David
Bianco, an analyst at UBS, calculated that earnings would have been
reduced by 8.6 percent at The Boeing Co. and 6.1 percent at Disney
without the favorable foreign sales-tax treatment.
In the future, however, Bianco expects taxes to be more of a
drag on earnings. The European Union has imposed tariffs on U.S.
exporters, and the bonus depreciation tax benefit in President Bush's
2002 stimulus deal disappears at year's end.