Business

Aside from credit crisis, quarterly profits on rise

On the surface, U.S. companies' second-quarter earnings were fairly respectable when you strip away the financial sector.

Profits for Standard & Poor's 500 members rose about 10 percent from a year earlier after falling sharply the two previous quarters.

Looking closer, it's clear that companies managed that feat by cutting costs and jobs to cope with soaring commodities prices, a broken credit market and the ongoing housing slump.

Companies can't slash their way to growth, however. So investors are trying to assess companies' well-being by focusing on revenue.

“Right now, they are navigating a storm, but what if that storm turns out to be a hurricane?” said Howard Silverblatt, senior index analyst for Standard & Poor's.

More than 70 percent of the S&P 500 companies have reported results. So far, profit for the entire group is down almost 20 percent from a year earlier. However, remove the banks and brokerages that have suffered massive losses in the credit crisis, and S&P 500 members have seen profit grow by about 10 percent.

Though there's no way to track how many companies relied on one-time gains to beef up their profits, analysts say there's anecdotal evidence that it was higher than usual.

For instance, mobile phone maker Motorola Inc. handed Wall Street an unexpected profit, much of it due to cost cutting. Though sales were up across all of its business units, the company's overall revenue still fell 7.4 percent because of declining market share in its struggling handset unit.

Wall Street considers cost cuts and price increases as quite acceptable strategies for boosting profits. But they are something of a quick fix — eventually, companies run out of employees to cut from payrolls and risk losing customers by hiking prices.

American companies also have been making their numbers the past few years when exports offset sluggish domestic revenue growth. But that could also be in jeopardy. There are increasing signs that Europe's economy is slowing and that Asia's could follow.

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