The Current High Levels Of Corporate Profitability

Corporate profitability – and its sustainability – is a critical topic at this time for businesses.

While there are many ways to measure aggregate levels of corporate profitability, those used most prominently portray that overall corporate profitability is at (very) high levels when viewed from a long-term perspective.

One way to measure the level of corporate profitability is shown in a chart comparing corporate profitability as a percentage of GDP.   This chart, in which corporate profitability is depicted on an after-tax basis, is also depicted below. (For the chart of Corporate Profits After Tax, please see the May 30 post titled “After-Tax Corporate Profits Chart 1st Quarter 2013.”)

CP-GDP 5-30-13

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed May 30, 2013

This chart is through the first quarter and  the data was last updated on May 30.

A couple of statistics from the period shown on the chart, which dates back to the first quarter of 1947, include an average of 6.23% and a median of 5.87%.

As one might expect, other statistics concerning corporate profitability are also at or near record-high levels, such as the S&P500’s operating margins, operating profits, and EPS.

There have been various arguments offered as to the sustainability of current levels of corporate profitability; some arguments suggest that such levels are sustainable; others argue they are not.

There are various characteristics of this economic era that have been (very) favorable to corporate profitability; some of these factors include interest rates that, in general, are very low from a long-term historical perspective; subdued levels of wage growth; high-growth emerging markets that have expanded international sales – and in many cases margins; robust government deficits in many countries; and other factors.

I am of the belief (from an “all things considered standpoint”) that the current elevated levels of corporate profitability will not be sustainable; and the decline from these levels will have outsized ramifications in a variety of areas and for a number of parties.

In addition to the question as to whether corporate profitability is sustainable is the question as to what magnitude of a decline could be expected.  This topic is very complex and dependent upon many factors and assumptions.  However, it should be noted that a decline in after tax corporate profits as a percentage of GDP from it current level of 10.857% to the long-term average of 6.23% would represent a 43% decline.  Of course, due to a variety of factors, there is always the possibility of dropping below the average, perhaps substantially.

Such a decline in overall corporate profitability would likely impact each corporation differently, dependent upon a variety of its characteristics, including its industry, size, and numerous firm-specific business and financial characteristics.  From a corporate planning and risk management perspective, it behooves firms to (at least) contemplate, if not actively plan for a business environment in which a lower level of aggregate profitability exists.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

Profitability And Competition In The Grocery Business

Today (June 6), CNBC published an article titled “What’s Behind the Rush Into the Low-Margin Grocery Business.”  The article discusses various issues regarding competition and profitability in the grocery business.

Notable excerpts include:

Americans spend more than $565 billion dollars a year on groceries. After all, everybody eats, everyday…and more than once.

Despite the high revenue, the profit margins traditionally have been low in this business, but that hasn’t stopped retail giants Amazon.com and Wal-Mart Stores from escalating the national food fight.

also:

That said, grocery, online or off-line, remains a low-margin business. “Grocery is among the thinnest margins out there in retail. The average grocer probably gets a 2-, 2.5-, to 3-percent type operating margin. That’s a very slim margin, and that’s before interest and taxes,” Telsey Advisory’s Feldman said.

That doesn’t mean it’s a turn-off for the online behemoth, Feldman said. “Amazon’s history has been all about capturing market share and going as low as they can possibly go on price, sometimes even taking losses from what we can tell, if that’s the case, I don’t see why grocery would be any different, he said.”

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

Expectations Concerning Lower Prices

On June 3, the Wall Street Journal published a blog post titled “Are Consumers, Businesses Expecting Lower Prices?”  The article discusses facets and statistics regarding current and expected pricing trends.

A couple of notable excerpts include:

Regional Fed surveys also show weak pricing power among other manufacturers, which suggests other consumers are holding off on ordering. And the lack of demand may be slowing hiring.

also:

In a series of special questions asked in May, the New York Fed found the pressure to cut prices will continue over the coming year.

New York manufacturers anticipated an increase of just 1.2% in the prices they receive for their products, “the smallest expected increase recorded since these questions were first asked in May 2007,” the New York Fed said.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

 

Overall Corporate Profits Relative To GDP

In the last post (“After-Tax Corporate Profits Chart 1st Quarter 2013“) I displayed, for reference purposes, a long-term chart depicting Corporate Profits After Tax.

There are many ways to view this measure, both on an absolute as well as relative basis.

One relative measure is viewing Corporate Profits as a Percentage of GDP.  I feel that this metric is important for a variety of reasons.  As well, the measure is important to a variety of parties, including investors, businesses, and government policy makers.

As one can see from the  long-term chart below (updated through the first quarter), (After Tax) Corporate Profits as a Percentage of GDP is at levels that can be seen as historically (very) high.  While there are many reasons as to why this is so, from a going-forward standpoint I think it is important to recognize both that such a notable condition exists, as well as contemplate and/or plan for such factors and conditions that would come about if (and in my opinion “when”) a more historically “normal” ratio of Corporate Profits as a Percentage of GDP occurs.  This topic can be very complex in nature, and depends upon myriad factors.  In my opinion it deserves far greater recognition.

(click on chart to enlarge image)

CP-GDP 5-30-13

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed May 30, 2013

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

After-Tax Corporate Profits Chart 1st Quarter 2013

Today’s GDP release (Q1, 2nd Estimate) was accompanied by the BLS Corporate Profits (preliminary estimate) report for the 1st Quarter.

Of course, there are many ways to adjust and depict overall Corporate Profits.  For reference purposes, here is a chart from the St. Louis Federal Reserve (FRED) showing the Corporate Profits After Tax (last updated May 30,2013, with a value of $1737.6 Billion) :

CP_5-30-13 1737.6

Here is the Corporate Profits After Tax measure shown on a Percentage Change from a Year Ago perspective:

CP_5-30-13 1737.6 Percent Change From Year Ago

 

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.