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H. Erich Heinemann of Ladenburg, Thalmann & Co. estima

February 21, 1995

H. Erich Heinemann of Ladenburg, Thalmann & Co. estimates overall corporate profits grew even more slowly, at a 2.3 percent annualized rate. He says companies in the lagging areas of the economy were the ones that took on the most new workers. Those companies, which are mostly in the service sector, are being hit by rising costs at the same time they aren’t enjoying the sales or productivity growth of capital-goods manufacturers. That means companies that hired the most during the economic recovery, such as the retail and health-care fields, will begin to put on the brakes on staff expansion, Mr. Heinemann says.

In a recent report to clients, he advised, ``The expansion remains unbalanced and vulnerable to a downturn in 1996 or 1997.″

For the coming year, Ross DeVol of the Wefa Group economic consulting firm in Bala Cynwyd, Pa., expects profits growth in the first half to remain robust. He then sees higher interest rates hitting harder. Mr. DeVol’s prediction for overall profits growth: 14 percent in the first half, tapering off to 8.5 percent for the last two quarters of the year. That overall growth rate of 10.1 percent for 1995 would compare with 11.1 percent he expects the Commerce Department to report for 1994 and 12.8 percent in 1993.

Among industry groups, the Big Three auto makers earned a record $4.31 billion from the winning combination of higher sales, price increases and reduced costs. That compared with a $2.67 billion profit a year earlier. For the year, the auto makers earned $13.92 billion, more than five times the $2.45 billion they earned in 1993.

Analysts project that Detroit will post record earnings again in 1995, but they say the rate of improvement will slow considerably from last year.

The auto makers recently have begun to see softness in certain sectors of the market, such as small cars and minivans. In addition, now that the Japanese are making an all-out push to lower their costs, Detroit will have more trouble passing along big price increases this year than in recent years, analysts say.

Nonetheless, the consensus from Wall Street is that the Big Three will earn a combined $4.8 billion in the first quarter, up from $3.9 billion a year ago. The biggest reason is increasing sales. General Motors, for example, is forecasting that the industry will sell about 15.3 million light vehicles in 1995, up from 15.1 million vehicles last year. While that’s only a 1.3 percent rise, it’s enough to produce a healthy increase in profits because car companies have such heavy fixed costs.

Computer-industry profits soared as home and corporate customers rushed to snap up the latest models. Demand was particularly strong for personal computers equipped with multimedia functions for video and sound. The home PC market surged for much of the year, contributing to a 20 percent jump in unit shipments for the year world-wide, according to Dataquest Inc. market researchers.

Not every PC maker benefited. International Business Machines, while posting substantially improved profit from a year earlier, failed to meet demand for its new consumer desktop Aptiva, as well as other models.

Analysts expect the home market to remain strong enough this quarter to offset a slowdown in purchases from corporations awaiting a rollout of new models and software this year. Compaq, the PC market’s leader last year, has indicated first-quarter sales may be hurt by the company’s transition to a new line of computers, including notebook models and desktops based on Intel’s Pentium microprocessor.

Demand for powerful workstation computers also was strong, aiding big gains by Hewlett-Packard, Silicon Graphics and Sun Microsystems. Workstations are gaining share from more expensive and less versatile mainframes and minicomputers. Doug van Dorsten, an analyst at Hambrecht & Quist, expects demand to strengthen further this year, leading to a 1995 increase in unit shipments of 20 percent to 25 percent over 1994, compared with an increase in ``the mid-teens″ last year over 1993.

The nation’s largest tobacco companies posted strong gains, reflecting the industry’s rebound from the bruising price wars of 1993. The clear winner was Philip Morris, whose top-ranked Marlboro brand gained in both volume and market share, helping the company more than triple its net income.

Rival RJR Nabisco Holdings also improved profits dramatically, but some analysts are concerned about volume declines in the company’s key domestic tobacco business. For 1995, analysts are forecasting another strong year for tobacco amid intense speculation that the industry will soon be boosting cigarette prices.

Securities firms, battered by the bondmarket slump, ended their most difficult year since 1990 on a low note. Wall Street’s big investment banks that trade bonds for their own account fared worst: Principal transactions _ or trading using firms’ own money _ plummeted 60 percent at Bear Stearns; Salomon had proprietary-trading losses of $28 million, compared with income of $508 million a year earlier.

Salomon’s fourth-quarter results were buffeted by charges totaling $140 million for a huge bookkeeping error in its London and U.S. operations _ making 1994 Salomon’s worst year ever.

Brokerage firms that cater to individual investors managed to fare better; results at discount brokerage firms Charles Schwab and Quick & Reilly benefited from strong trading volume by small investors at the nation’s big stock exchanges. Still, paltry pretax profits were just $1.8 billion for the securities industry _ an 80 percent drop from its record 1993 results.

Analysts don’t expect much of a profit rebound this year, with trading and underwriting stocks and bonds likely to remain weak. Meanwhile, brokerage firms will continue to cut staff and noncore operations amid the industrywide slowdown, analysts say.

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