Profitability: Getting Harder

By Andrew Paparozzi
In November 19, 2012

The read on quarterly earnings reported by major companies—they’re not as good as they were. A key question: Is this just a temporary cyclical move or the beginning of a trend. Of course, much of the initial focus on these reports gravitates to the immediate impact on the company’s equity price. But, of course, the importance goes deeper. A four-quarter moving average of before-tax corporate profits showed an increase of 7.7% in the second quarter. This is down slightly from the 8.7% in the first quarter but substantially below the double-digit gains of 2010 and first half of 2011. The consensus outlook from Blue Chip Economic Indicators has before-tax corporate profits rising just 6.5% in 2012 and continuing to slow in 2013 with a gain of 4.3%. It appears that in terms of companies being able to boost or even maintain profitability, the low-hanging fruit has been picked. It’s going to become more difficult, especially when operating within a subpar economy. And based on the latest consensus outlook from Blue Chip Economic Indicators, that’s exactly what we’ll have for a while. Inflation-adjusted GDP is expected to rise just 2.0% in 2013, after rising just 2.2% this year.

Difficulty in maintaining or boosting profitability is an issue the commercial printing industry has been wrestling with for some time. Data for October show only 30.5% of NAPL State of the Industry participants reporting that pre-tax profitability is increasing compared with last year. For the remainder, profitability is either decreasing (38.6%) or holding steady (29.1%). In addition to stagnant sales, a key factor behind the problems with profitability: Companies continue to experience difficulty in raising prices. Data show that among NAPL State of the Industry participants only one in three companies (27.6%) indicated that their prices thus far in 2012 including any cost pass through (paper, materials, energy, etc.) are above those for a similar period last year. For 18.2% prices are lower and they’re holding steady for 51.4%. Margins are being squeezed by rising costs and a lack of pricing power.

Some representative comments among research participants included:

• “Just trying to charge more in order to help the bottom line. It’s not working.”

• “Pricing is still a problem; discounts are increasing.”

• “Pricing pressure is still tough – we’ve tried to hold our ground and have lost some business. We see no improvement in pricing pressure. We need to continue to be more efficient and reduce costs.”

• “Competitive price point has dropped based on client feed-back and price required to win work.”

With the elections behind us, attention has now squarely focused on the impending “fiscal cliff.” Unless Congress acts, January 1, 2013 will usher in the expiration of all the Bush-era tax cuts as well as steep automatic spending cuts. The Congressional Budget Office (CBO) estimates that if this occurs and persists for much of the year, the economy will slide back into recession—contracting 0.5% on a fourth quarter to fourth quarter basis. Conventional thinking is that some compromise will be reached. However, it is unlikely we will be spared any political maneuvering from both sides.  And we may very well fall off the cliff for a brief moment. As the debate in Washington continues, it is extremely important to remember that resolution to the fiscal cliff will not resolve the issues facing our industry—Mapping out and creating one’s own recovery remains the best, if not the only, path forward.

The data in this post reflect conditions prior to Hurricane Sandy. No doubt the immediate impact of the storm will be negative, and for some it will be devastating. Our thoughts and prayers go out to all those impactedboth personally and professionally.

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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