Bangkok--8 Sep--Standard & Poor's
Credit trends for U.S. nonfinancial corporate issuers were fairly positive in August, said an article published today by Standard & Poor's. The article, which is titled "U.S. Corporate Credit Outlook: September 2010," says that Standard & Poor's Ratings Services upgraded 24 companies and downgraded 16 during the month. In addition, negative bias--the proportion of issuers with a negative outlook or ratings on CreditWatch negative--is either at or close to all-time lows for the investment-grade and speculative-grade segments. The primary bond market was very active in August. Investment-grade issuers tapped the market at very low yields, while speculative-grade issuance, which totaled $18 billion, was a record high for the month of August.
"Growth in nonfinancial corporate profits was solid in the second quarter, though the growth rate declined from the previous two quarters," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. Based on data from the Commerce Department, nonfinancial domestic corporate profit (pretax and before inventory and capital consumption adjustments) was up 3.5% quarter over quarter in the second quarter, compared with a growth rate of 22% in the first quarter.
Corporations have boosted the bottom line by keeping labor costs low. Labor costs as a share of value added for nonfinancial corporate issuers was a record-low 61.3% in the second quarter, according to Commerce Department data. Based on a sample of 780 rated U.S. nonfinancial companies, EBITDA margins in second-quarter 2010 expanded, on average, 7.4% versus the previous quarter. "However, companies will be hard pressed to maintain margins as pricing power remains subdued and costs are likely to rise," Ms. Vazza added. "Indeed, revenue growth was sluggish in the second quarter, at just 0.5% for our sample of rated companies." According to the Bureau of labor Statistics, unit labor costs for nonfinancial corporations in the second quarter fell just 0.5% in the second quarter compared with an 8.7% drop in the first quarter.
With labor cost more likely to rise than fall and pricing power still very weak, we expect to see margins decline early next year unless companies can offset pressures with lower non-labor costs. This raises the risk that earnings will come in below estimates over the next few quarters.
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Media Contact:
David Wargin, New York (1) 212-438-1579,
[email protected]
Analyst Contact:
Diane Vazza, New York (1) 212-438-2760