Thursday, July 21, 2011

S&P 500 Revenues & Profit Margin

Globalization isn’t wonderful for everyone. However, it is wonderful for S&P 500 corporations. More and more of them are finding more and more of their revenue and profit growth overseas, as evidenced by the Q2 results of Apple, IBM, and Coca-Cola.

Nominal GDP rose only 3.8% during 2010 compared to 2009 in the US. Yet, S&P 500 revenues rose 8.6% in 2010. Excluding Financials it was up 9.5%. On the other hand, excluding Energy it was up 6.5%, but that still well outpaced the growth in US nominal GDP.

This year, the consensus estimate of revenue growth for the S&P 500 is 9.2%, and 11.2% excluding Financials. During the week of July 15, the estimate for 2011 was $1,034.68 a share, near the highest reading so far this year. The same can be said about the 2012 estimate of $1,097.15.

As for 2012, industry analysts are cautiously optimistic, with a projected growth rate of 6.0% for S&P 500 revenues. Given the slowdown in the expected growth of revenues next year, why do industry analysts expect that S&P 500 earnings will rise 15.7% to $113 a share? Their estimates for these two variables imply that they expect that the profit margin of the S&P 500 will rise to 10.2% next year from 9.4% this year.

More likely is that S&P 500 earnings will rise 6.0% in 2011 to $105 a share from $99 this year. That’s because it’s hard to see any upside in the profit margin given that it is back to the previous cyclical high already. There may not be much downside either given the focus on containing costs and boosting productivity. So earnings should grow at the same pace as revenues, which should be around 6%, that should beat the growth rate in US nominal GDP thanks to Globalization.

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