HAVEN'T REACHED MUSCLE YET:

Cost Cutting Boosts Profits: After a Long Decline, Revenue for S&P 500 Companies Is Climbing Again (PAUL VIGNA And JOHN SHIPMAN, 2/05/10, WSJ)

Perhaps most heartening about the quarter's results is that sales are on track to break a string of four consecutive double-digit-percentage declines. Still, the projected increase is well below the average 3.95% gain since 1994, according to S&P.

Despite modest sales growth, corporations have managed to craft their profit growth mainly through massive cost cutting. For the beat to continue, companies will need to drive the top line, and that looks to be a key challenge for an economy where demand is depressed, with at least 10% of the work force unemployed and another large swath underemployed.

"Until nonfinancials [corporations] see sustained sales growth, they will not be hiring, and that is the whole ballgame," said Howard Silverblatt, S&P's senior index analyst.

For 2009, S&P 500 members should see sales down about $1.1 trillion, or 13% from the prior year. For the fourth quarter, sales are expected to total about $2.05 trillion, which gets the group back to the level of the first quarter of 2006. In other words, the intense recession has set sales of the nation's 500-largest companies back nearly four years.

The S&P 500 companies are just breaking a string of nine-straight quarters of profit declines. Many are going to be reluctant to eat into that newfound earnings growth by ramping up the work force, given that compensation is one of the largest costs for any company. Automated Data Processing Inc. said it is hiring new sales staff, even though it expects that to be a drag on earnings for at least a year.

Cisco Systems Inc. came out with the boldest outlook this earnings season, pegging sales growth around 25% and announcing it will hire 2,000 to 3,000 new people to help it handle its growing business. Not many companies have outlined such a bullish near-term view.

Unfortunately, more companies, including Verizon Communications Inc., Wal-Mart Stores Inc. and Diebold Inc., continue to pare workers. And Bristol-Myers Squibb Co. this week froze employee salaries world-wide for 2010.

And we all know what we need to do to boost demand.

Posted by Orrin Judd at February 5, 2010 6:41 AM