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Tuesday, February 7, 2012 – Daily News 3B Corporate profits aren't what they seem NEW YORK (AP) — Is the great profit engine of corporate America running out of steam? While other parts of the economy struggled the past two years, large companies managed to rack up higher profits quarter after quarter. Now reality is catching up with big business. As companies close their books on the final three months of last year, the big ones that make up the Standard & Poor's 500 stock index appear likely to earn about $230 billion. That would be $12.6 billion more than a year earlier. But the increase, 5.8 per- cent, is less than half the speed at which quarterly profits grew the first nine months of 2011. In the average quarter since the beginning of 2010, earnings have grown five times as fast. Analysts expect profit growth to accelerate later this year. But so far, almost all the growth comes from two companies, one of them among America's most favorite, the other among its most hated — Apple and the bailed-out insurance company AIG. Take away those two companies and profits for the remaining 498 are expected to grow a measly 1.1 percent, according to FactSet, a provider of finan- cial data. The immediate future looks about the same. For this quarter, which ends March 31, profits for the S&P 500 are expected to be up about 1 percent from the year before. And that's with Apple and AIG thrown in. ''Were the economy to sustain a shock, this makes us more vulnerable,'' says Barry Knapp, chief U.S. stock strategist at Barclays Capital. In a report Thursday highlighting ''unusually weak'' results so far, Gold- man Sachs strategist David Kostin noted that stock ana- lysts have been cutting their estimates for what S&P companies will make for all of 2012. His projection has prof- its rising 3 percent this year versus 2011, and it has stocks in the S&P 500 no higher than they were when the year started. That would reverse a strong 6.9 percent rise so far this year. The darkening profit picture comes at the wrong time for the economy, which is finally gaining momentum. The country added an unexpectedly robust 243,000 jobs last month, and unemployment has fallen to 8.3 percent, the lowest in three years. Rising profits have helped the country heal from the Great Recession. They have allowed compa- nies to hire, invest in equip- ment and software and raise stock dividends. The dan- ger is that as profit growth ebbs, so will the boost to the economy. The reasons for the slowdown are myriad: — Among the almost 300 companies in the S&P that have reported profits so far, some seem to have run out of ways to cut costs, and are making less profit from each sale, a first in the recovery. To help lift its drooping profit margins, for instance, Colgate-Palmo- live said last week that it was raising prices in North America for the first time in two years. Profit fell 5 per- cent last quarter. — Other companies point the finger overseas. Dow Chemical, the nation's largest chemical maker, blamed ''considerable weakness'' in debt-mired Europe for its profit last quarter of 25 cents per share, before a one-time charge. That was less than expected. 3M, which makes Scotch tape and Post-It notes, is worried about slower growth in emerging markets like China, and says that helps explain its tiny 3 percent profit growth last quarter. — Still others point to the strengthening U.S. dol- lar, which means profits that companies collect in foreign currencies like the euro translate into fewer dollars when they're brought home. In cutting profit forecasts for 2012, Procter & Gamble and Pfiz- er both cited the stronger dollar. Their stocks have dropped this year. But perhaps the biggest reason for the small gains is simple — an investing ver- sion of the law of large numbers. With profits crushed by the Great Recession, it did- n't take much early in the economic recovery for companies to report big increases. But now that profits have climbed fast for two years, it's harder to show a jump by a similar proportion. ''The base is much more challenging,'' says John Butters, senior earnings analyst at FactSet. Profits per share at Exxon Mobil rose just 2 percent last quarter, and the stock has fallen. But the company still made $41 bil- lion last year, more than the annual economic output of nearly half the world's countries. To keep growing profits at the rate of the past year and a half, the company would have to earn $65 bil- lion this year — more than three times what it generat- ed two years ago. If profit growth for the S&P continues to ebb, it will mark the end of a remarkable run. At the start of the bull market in March 2009, when stocks hit 12-year lows, many professional investors worried that the weak economy would keep a lid on profits. But compa- nies cut staff, squeezed more out of the workers who remained and made more money than nearly anyone expected. Skeptics noted that com- panies could only cut so much. But companies kept cutting and squeezing and posted even higher num- bers. Then, when domestic revenue didn't grow as quickly as expected, com- panies compensated by finding buyers abroad, and posted higher profits again. For eight quarters in a row through last year's third, companies in the S&P increased earnings by double-digit rates. The average increase was a blis- tering 41 percent. By con- trast, the average increase over the past quarter-centu- ry is 8.2 percent — not counting the fourth quarter of 2009, when earnings growth was astronomical but the comparison was misleading because of the financial crisis a year earli- er. A return to a more nor- mal rate of increase may seem unremarkable. After all, the expected 5.8 percent rise for last quarter is still expected to push annual combined S&P profits to a record $96.33 per share, according to FactSet. And for every company that has posted profits lower than analyst expectations so far, two companies are meeting or surpassing them. and fissures appear. But again, look closer Companies are beating expectations mostly because the expectations have been lowered. In the three months before com- panies began reporting profits last month, analysts cut estimates for profit growth by more than half. Then there's the Apple- AIG effect. The maker of the iPhone and iPad is mak- ing everyone else in the S&P look good thanks to its huge $13 billion profit last quarter, more than double what it made a year earlier. As for AIG, the good news is not that it's making much money — it isn't — but that it's not losing money anymore. Later this month, it is expected to report $1.1 billion in oper- ating profits last quarter, compared with a $2.2 bil- lion loss a year earlier, according to FactSet. Add it up and the two companies will contribute four of every five dollars of profit growth. The stock market appears to be ignoring all this, and perhaps for good reason. Investors buy and sell stocks mostly based on what they expect compa- nies to earn in the future, not on what they made in the past. And though dour in the short run, investors expect big gains as economies of the U.S. and some of its big trading part- ners pick up later in the year. Profits at aluminum maker Alcoa fell in the fourth quarter, and are expected to slump again this quarter. Yet its stock has risen anyway — 24 per- cent this year. The reason is that investors are banking on a 23 percent climb in earnings in the last three months of the year. Overall, profits in the S&P are expected to jump nearly 18 percent in the final three months after a 5 percent increase in the first nine months, according to FactSet. Sam Stovall, chief equi- ty strategist at S&P Capital IQ, a research firm, says profits from big companies are like a high-speed train that seemingly can't be stopped, and he's betting it won't. But even he's wor- ried with so much riding on an upturn late in the year. ''The train is approach- ing a switch,'' he says, ''and if it isn't thrown, we could go tumbling down the cliff.'' Parents protest at scandalized LA grade school LOS ANGELES (AP) — Many children stayed home Monday while par- ents demanded more pro- tection at an elementary school where two teachers are suspected of molesting students in class. Nearly a quarter of the students at Miramonte Ele- mentary School were absent, with attendance reaching just 72 percent, according to figures from the Los Angeles Unified School District. Meanwhile, about three dozen parents and support- ers protested in front of the main doors off the school. Some carried a banner reading, ''We the parents demand our children be protected from lewd teacher acts.'' School police watched and sheriff's deputies were on hand, but there was no violence. Elsewhere, a janitor at a San Fernando Valley ele- mentary school was arrest- ed on suspicion of commit- ting a lewd act with a child on a campus. Paul Adame, 37, was taken into custody after a mother told police on Sun- day that he had inappropri- ate contact with her child during school hours Friday at Germain Elementary School in the Chatsworth area of Los Angeles, police Capt. Kris Pitcher said at a news conference. The captain declined to provide details but urged anyone who might know of other possible victims to contact police. There was no immedi- ate word of any connection between the arrest of the janitor and the cases at Miramonte, which is 15 miles away in an unincor- porated county area of South Los Angeles. The Miramonte protest- ers demanded greater com- munication with education officials and the placement of cameras in classrooms and hallways. Arianna Perez, 30, also wants a new principal and teachers, or at least a new round of background checks for the 50 or so instructors. She kept her two sons out of the school on Monday. ''I'm not letting them in (school),'' she said of her children. ''They're scared to be in. I'm not going to put them in risk of (teach- ers) doing something to them.'' Neither of her boys was a student of the two teach- ers named in the allega- tions. ''I don't want to go to the school anymore,'' said son Luis, 11. ''I feel unsafe. and I feel like something bad's going to happen, like what hap- pened to others.'' The protest was an unusual event in the poor, overwhelmingly Latino neighborhood, where many parents and students struggle with the English language. Many people finally gathered around former state senator-turned-lawyer Martha Escutia, who lec- tured them in Spanish about how to organize for the media and suggested a catchy name for their fledgling movement: Mothers of Miramonte. Los Angeles Unified School District Superin- tendent John Deasy planned a 6 p.m. Monday meeting with Miramonte parents on a nearby high school campus. The school board met in a hastily called closed session Mon- day morning to discuss the Miramonte case, said dis- trict spokesman Tom Waldman. School officials can- celed classes at the school on Tuesday and Wednes- day as a cooling-off period, Waldman said. YEARBOOK This would probably be it: If Red Bluff had a Red Bluff 2012 A Daily News Publication City Parks and Services Lassen Volcanic National Park North State's Wine Country Red Bluff Round-Up Victorian Charm Last week, teacher Mark Berndt, 61, who worked at the school for 32 years, was charged with committing lewd acts on 23 children, ages 6 to 10, between 2005 and 2010. The acts cited by authorities include blind- folding children and feed- ing them his own semen in his classroom in what chil- dren were allegedly told was a tasting game. Berndt remains jailed on $23 million bail and could face life in prison if convicted. Advertising Space Reservation Deadline: Tuesday, February 7 at 5 PM City and County Information Recreation Guide Local places of interest City Map & Street Guide Schools Directory Church Guide Public Services Calendar of Events …and more! 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