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Thread: Profit Growth Expected to Slow

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    Default Profit Growth Expected to Slow

    Tuesday, January 11, 2005


    NEW YORK — As the U.S. earnings season begins in earnest and investors get their first look this year at the health of corporate America, some early signs confirm fears of a slowdown in profits growth.

    Alcoa Inc. (), the world's biggest aluminum producer, and biotechnology company Genentech Inc. on Monday reported lower-than-expected fourth-quarter earnings.

    The same day, chip maker Advanced Micro Devices Inc. () warned that its fourth-quarter revenue would fall below Wall Street's expectations.

    Analysts have warned that higher costs for companies in raw materials, energy and wages, coupled with higher interest rates, could slow profit growth further in 2005.

    Also, pre-announcements from companies in the technology and consumer cyclical sectors have cited decreased demand, pricing pressures and increased inventories as the primary reasons for their lowered outlooks.

    While fourth-quarter 2004 earnings overall are expected to grow 15.5 percent year-over-year for companies in the Standard & Poor's 500 index (), most sectors in the index will lag that rate of profit growth considerably, according to Reuters Estimates.

    For the whole of 2005, Reuters Estimates expects earnings growth of 10.6 percent, about half the rate it estimates for 2004.

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    Default Re: Profit Growth Expected to Slow

    Yup agreed. However, just because a company doesn't have profits it doesn't necessarily mean that the price of their stock shares won't rise. I'm simply flabbergasted at the price some people are willing to pay for shares of Google, Genentech and a host of other companies whose stock action is 'emotionally driven' i.e. the promise of great future profits despite current losses.

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    Default Re: Profit Growth Expected to Slow

    Actaully 2005 pretax profits are going to surprise folks to the upside who do not know a quirk. There has been a tax consideration which people who do not REALLY know what they are doing are going to overlook.

    The 2002 tax act (after 9/11) gave companies an up front depreciation of 30% (later raised to 50% in 2003) for equipment investment. Most companies use that depreciaition on their books as well and depreciaiton reduces reported income. Since that tax allowance program ended companies will be claiming LESS depreciation and profits will go Up more than 20% (closer to 30%) on a reported basis even though the government's concept of economic profits will only go up 7%. (Depreciation is a charge against income)

    This is kind of arcane but is an artifact of accounting rules. The exact opposite effect held profits down in 2002. The real pros on Wall Street know this but "Joe six-pack" does not.

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    Default Re: Profit Growth Expected to Slow

    Geek, I was aware of this accelerated depreciation allowance. However, the 'usefulness' of this allowance varies widely from industry to industry. And at the same time that industries are writing off capital investments, they're also paying out more in the form of higher health insurance premiums for employees, higher comp/unemployment premiums to states, higher energy costs etc. Would you care to take a stab at naming a few companies which you figure might benefit more from the allowance than they will suffer from other costs rising ?

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    Default Re: Profit Growth Expected to Slow

    Melonie, those things are happening now! And profits are up double digits with them happening. This sitortion effect is BIG!!! See the BES's table at http://bea.gov/bea/dn/technote_jobcreation.xls

    At q3 it was $166 billion at an annual rate and it is not just going to revert to normal, companies will be depreciating LESS than they would have if the rules had not changed because now they have less left to depreciate on 2002 3,4 investments.

    The leasing companies are the obvious largest swing industry. I cannot name names but look at their depreciation and investment levels the last few years. Bank and finace are big eqpt buyers as are fast growing industries. If you are doing a company scan look at depreciation divided by investment. the higher that is for industries that do not buy structures (steel mills and refineries) the larger the effect.

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