The Top 10 Most Profitable Companies in America

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 "Hey Ya" by Outkast was just hitting the airwaves.

If you were at a dinner party then and predicted Apple (Nasdaq: AAPL ) 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 more profitable.

But your crystal ball would have been accurate. Apple earned an eye-popping $25.9 billion in 2011, more than any U.S. company besides ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) .

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 powerhouse ExxonMobil.

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 profit powerhouse ExxonMobil.

It may be no coincidence that another technology company joins Apple in the ranks of the nation's fastest profit growers. Google (Nasdaq: GOOG ) has boosted net income 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 mean falling profits (or outright losses) for fallen tech stars such as Nokia (NYSE: NOK ) , Sony (NYSE: SNE ) and Hewlett-Packard (NYSE: HPQ ) .

Is bigger better?

Yet it's fair to ask, does a highly profitable company make for a good investment? Not necessarily. Companies like Microsoft (Nasdaq: MSFT ) and GE (NYSE: GE ) actually have lost you money since the market peaked at the start of the last decade. It's not that their profits have fallen -- rather, the price-to-earnings ( P/E ) ratio fell at a faster rate than profits rose. Even mighty ExxonMobil is unable to provide investors with robust gains anymore. Its shares 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 P/E ratio.

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 Merck (NYSE: MRK ) 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.

Take Ford Motor (NYSE: F ) . 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 most profitable public company in the United States -- behind Pfizer (NYSE: OFE ) and ahead of Coca-Cola (NYSE: KO ) -- 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 global economy . 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 even take market share from leading foreign rivals. As they do, their profits should scale new heights, bringing their stock prices with them.

This article originally appeared on 10 Of The Most Outrageously Profitable Companies In America

-- 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" portfolios.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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