The Sustainability Of Profit Margins

The topic of corporate earnings growth and its sustainability, given a variety of metrics, has been discussed in various posts in this blog.

The Wall Street Journal article of August 24-25, 2013, titled “Lofty Profit Margins Hint at Pain to Come for U.S. Shares,” discusses various facets of whether corporate profit margins are likely to be sustained.  As well, corporate profit margins and fluctuations are discussed from a long-term historical perspective.

While the article contains various noteworthy comments, here is one excerpt:

U.S. corporations, on average, currently report a profit of 9.3 cents for every dollar of sales, according to U.S. Commerce Department data—a profit margin of 9.3%. It has gotten only slightly higher than this over the past six decades: In the fourth quarter of 2011, it was 10%. The average since 1952 is 5.9%.

Profit margins in the past have exhibited a strong historical tendency to “revert to the mean,” according to James Montier, a visiting fellow at the U.K.’s University of Durham and a member of the asset-allocation team at Boston-based GMO, an investment firm with $108 billion under management. That is, above-average levels in the past have tended to quickly fall, just as below-average levels in the past have soon risen.

Consider all occasions since the early 1950s in which the profit margin rose to at least 6.9% or fell to at least 4.9%—one percentage point away from its historical mean, in other words. On average, it was back at its mean in just 4.8 years.

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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 optimally increase revenues and profitability.