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Higher Profits on Lower Revenues

Tom Grill | Photographer's Choice | Getty Images

With the U.S. economic recovery proceeding so slowly, the big stories once again this earnings reporting season are whether companies are growing revenue, as opposed to boosting profits through cost-cutting, and whether end-market demand is increasing.

As we’ve also talked about, companies are sitting on an extraordinary amount of cash right nowbecause of uncertainty about both the economy and higher costs in 2011.

In fact, of the first 175 companies in the S&P 500 to report, profits are up 42% while sales have increased only 7%, according to a New York Times article today. Ten percent of companies had higher profits on lower sales, almost double what used to be the typical number.

We heard from one of the most important companies late last week, and the news was surprisingly good. Caterpillarreported earnings Thursday, and it is a true bellwether because it is the world’s largest manufacturer of construction and mining equipment. If sales of their equipment are strong, then the companies buying the equipment clearly have enough business or expect enough business to make the expenditure.

"We’re out of the period when you could refinance your liabilities again and again to create profitability. In this environment, we see earnings increases in companies that pursue productivity rather than profitability per se." -SK Capital Partners, Clark Winter

CAT’s second-quarter earnings significantly beat expectations — by 24 cents per share. The positive report really set the tone for the market's 2%-plus jump that day, and CAT itself was up 1.7% on the day. The stock had a phenomenal week, gaining nearly 7%.

I interviewed Caterpillar CEO Doug Oberhelman, who has just stepped into that role, and I wanted you to hear his take on the U.S. and the world. Manufacturing has been one of the few bright spots of the U.S. economy in recent quarters, and we talked about everything from his views on the recovery to specific projects on the horizon (such as a high-speed train project in Europe) to activity in Brazil. (You can watch the interview here)

Clark Winter: The Trend Continues

I also talked with noted investor Clark Winter about earnings in my Wall Street newsletter. I always enjoy hearing his perspective, and we caught up with Clark on his latest trip to Europe.

“For me, the macro theme is the continuation of what we’ve been talking about, Maria, and that’s the shift from financial engineers to real engineers — electrical, mechanical, industrial,” he said. “We’re out of the period when you could refinance your liabilities again and again to create profitability. In this environment, we see earnings increases in companies that pursue productivity rather than profitability per se. They are giving improved efficiencies to their customers, not enhancing revenue through accounting gymnastics.”

The earnings reports continue this week. Some of the big names to watch include Lockheed Martin, Boeing, Sprint Nextel, Northrop Grumman and Chevron. (Track All Your Earnings News Here)

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