Profitability: Where is it Headed?

By Andrew Paparozzi
In January 20, 2011

According to the latest data from the Bureau of Economics Analysis, corporate profits from current production in the third quarter were 28.7% above a year ago. Although the year-over-year increases have been trending lower, the gain still compares quite favorably to the 3.9% year-over-year decline recorded in the third quarter of 2009. Going forward, undoubtedly the gains will continue to trend lower. The question remains: At what point does the trend begin to stabilize? Of course, much will depend on the overall strength of the economy. And based on the latest data, the economy is showing signs improvement. But for individual industries, not to mention individual companies, much will also depend on industry/company specifics—costs, pricing power, profit margins, etc.

According to the latest Quarterly Financial Results (QFR), operating profits for manufacturing rose 32.1% in the third quarter of 2010 from a year ago. The increase resulted from a 12.2% gain in sales and a rise in the profit to sales ratio to 8.1%. In the third quarter of 2009, this ratio stood at 6.9%. No doubt, the increase in the ratio reflects the sector’s extensive cost cutting efforts and substantial productivity gains. As for printing and related support activities, the QFR showed that operating profits recorded a similar gain, up 32.3%. However, the increase resulted from a gain in sales of only 2.4%. The operating profits to sales ratio for the industry jumped from 5.8% in the third quarter of 2009 to a reading of 7.5% in the third quarter of this year. Data from the NAPL Printing Business Panel confirm the notion that profitability for the industry is improving, as 36.4% of the Panel in November indicted that profitability was increasing—above the 28.8% that reported decreasing profitability. In December of 2009, the percentages were quite different; increasing (16.8%), decreasing (57.2%).

Despite the onset of recovery, printing companies as represented by participants to the NAPL State of the Industry Survey are not overly bullish on 2011. See the “Commercial Printing Industry 2011: Realistic Expectations and Lessons Learned” post in the State of the Industry Analysis section of NAPL Performance Indicators. While almost 70.0% expect to grow in 2011, only 39.2% of participants indicated that hey expect profitability to increase in 2011. As participants indicated, a key factor restraining gains in profitability will be pricing power—only one in four (24.6%) participants expects to raise prices next year. Without further improvement in pricing power, additional sales gains will be needed to offset rising costs from energy, taxes, employee benefits, etc.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

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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