Take your mind to 2003. The United States has just sent troops
into Iraq, Alex Rodriguez has just swatted 47 home runs for the
Texas Rangers and
by Outkast was just hitting the airwaves.
If you were at a dinner party then and predicted
would eventually become the third most-profitable company in
America, you would have been laughed out of the room.
After all, Apple earned just $68 million that year, meaning there
were hundreds of public companies in the United States that were
But your crystal ball would have been accurate. Apple earned an
eye-popping $25.9 billion in 2011, more than any U.S. company
The fact that Apple was able to boost profits by 38,000% since
2003 is beyond astounding. Apple is likely to pass Chevron this
year, setting its sights on
It may be no coincidence that another technology company joins
Apple in the ranks of the nation's fastest profit growers.
by more than 9,000% in that time frame -- from $105 million in 2003
to a recent $9.7 billion. Technology is one of the few industries
in which nimble and aggressive players can disrupt the entire
ecosystem. Of course, gains for companies such as Apple and Google
falling profits (or outright losses) for fallen tech stars such as
Is bigger better?
Yet it's fair to ask, does a highly profitable company make for a
good investment? Not necessarily. Companies like
actually have lost you money since the
peaked at the start of the last decade. It's not that their profits
have fallen -- rather, the price-to-earnings (
) ratio fell at a faster rate than profits rose. Even mighty
ExxonMobil is unable to provide investors with robust gains
rose from around $5 (split-adjusted) in 1982 to around $20 in 1996
and ultimately more than $90 by the end of 2007. But since then,
shares have actually fallen a bit in value.
Of course, Apple investors surely credit the robust profit growth
for their winning investment. Shares have risen from under $10 in
2003 to a recent $623. Yet the lesson of Microsoft, GE, Exxon Mobil
and others needs to be heeded: There is little reason to anticipate
further major gains for Apple. Its profits will quite likely rise
much higher, but the "laws of bigness" will start to weigh on its
Shrinking into irrelevance?
Some companies and industries looked healthier in 2003 than they do
now. For example, Citigroup's profits in 2011 were a respectable
$11 billion. But in 2003, they were $17 billion.
Thanks to robust investments in the fast-growing economies of Asia
and Latin America, coupled with an eventual rebound in the U.S.
housing market, Citigroup has a decent shot of returning to those
2003 profit levels in a few years. But the regulatory climate
around banks is starting to get tougher, and the major banks have
already conceded that this industry's profit margins are unlikely
to return to past peaks.
Drug stocks likely have already witnessed their heyday as well. Did
you know that
made 3% less profit in 2011 than it did in 2003? Frankly, the
profit drop would have been much worse had Merck failed to embark
on a massive cost-cutting program. Merck continues to see key drugs
lose patent protection and become exposed to the generic drug
market, so analysts are anticipating sales to fall a bit in 2012
and again in 2013. Per-share profits appear stuck in the $3.75
range for 2012 and 2013, as was the case in 2011.
The Best is yet to come
Yet the snapshot between 2003 and 2011 may obscure a more positive
story that is unfolding across America. In many industries,
companies used the economic crisis of 2008 to take a closer look at
their operations to ferret out any drags on costs. Sure, they've
cut labor expenses through layoffs, but they've also improved their
product designs to lower their costs to manufacture and they're
building world-class products that are getting premium pricing.
Ford Motor (NYSE:
. In 2003, the company was riding the wave of SUVs and pickup
trucks to solid sales results. But Ford was so bloated and
lethargic that it posted just 0.7% operating margins (good for $646
million in net income). Fast forward to 2011 and you'll find a
struggling industry, where auto and truck sales remain several
million units below levels seen in 2003. Yet Ford is such a leaner
operator that it generated 5.6% operating margins, which led to
$8.6 billion in net income. That's a 1,244% gain!
If the auto industry ever returns to sales volumes seen in the
middle of the last decade, then Ford, which is currently the 22nd
in the United States -- behind
and ahead of
-- is likely to move up the leaderboard. To make the top-10 and
surpass GE, Ford would have to earn $14.5 billion.
Action to Take -->
Many of the leading companies have gotten a lift from cost-cutting
that has pushed profit margins to record levels -- despite a weak
. Looking ahead, an improving economy is likely to boost sales, but
companies will need to start investing for growth, which likely
means that profit margins have already peaked in this cycle.
Where will tomorrow's profit leaders come from? The example of Ford
is insightful. Many U.S. industrial firms are in the strongest
shape they've ever been in, though you wouldn't know it judging by
so-so stock price performance over the past 10 years. Yet as the
global economy mends, many of these firms are poised to retain or
from leading foreign rivals. As they do, their profits should scale
new heights, bringing their stock prices with them.
This article originally appeared on InvestingAnswers.com:
10 Of The Most Outrageously Profitable Companies In
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MSFT, KO, XOM, GOOG in one or more if its "real money"
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