Each January, 24/7 Wall St. makes its predictions about which publicly traded U.S. companies it feels will have the highest profits in the year ahead. Last year, Apple (AAPL) intermittently edged ahead of Exxon Mobil (XOM) for the highest market capitalization in the Fortune 500, and in 2012, Apple is likely to pass Exxon Mobil as the most profitable corporation. The market appears to anticipate Apple will keep up a rapid growth rate comparable to that it has enjoyed for the past two years. The stock has repeatedly hit new highs recently and now trades at $425, up nearly 25% in the past year.
Most of the largest U.S. companies won't produce large year-over-year earnings swings, with the notable exception of financial firms. Most banks and investment houses will suffer earnings declines in 2012 due to poor trading results and bad loans, notwithstanding the fact that JPMorgan Chase (JPM), arguably the best-run bank in America, made our most-profitable list, as did Wells Fargo (WFC). Corporations like IBM (IBM) and Procter & Gamble (PG) have such huge customer bases worldwide that they can hardly outperform the global economy. What differentiates them is their ability to manage their operations better than peers as they keep expenses low and take all the advantages they can of their significant market shares.
24/7 Wall St. looked at the top 200 companies in the Fortune 500 based on revenue in the past reported year. We then reviewed earnings and earnings forecasts from Thomson/First Call. There were some cases in which earnings appeared to be too low or too high because they failed to reflect more recent events. We took those into account when we produced the final numbers.
Prediction: The Most Profitable Companies of 2012
The 10 U.S. Companies That Will Be Most Profitable in 2012
Wells Fargo is one of a few large U.S. banks that has only modest exposure to mortgage-related problems. Because of its buyout of Wachovia, however, it is involved in some of the government lawsuits regarding mortgage fraud.
Wells Fargo does not have a large investment bank, so it will not suffer from the downturns in trading and M&A that have hurt other financial firms. Wells Fargo is the second-largest bank in the U.S. by deposits and one of the largest credit card issuers.
Procter & Gamble remains the world’s largest consumer products company. It operates in 180 countries, and owns global brands such as Tide, Charmin, Bounty and Cascade. P&G claims it has 24 brands worth $1 billion each. It also says its products reach 4.4 billion people a day.
Compared to competitors such as Colgate, P&G’s size, brands and balance sheet give it a number of advantages, including access to capital at low rates and brand equity. For some of P&G’s products, brand equity has been built up over several decades.
Johnson & Johnson’s (JNJ) troubles in recent years primarily stemmed from a number of massive recalls of its over-the-counter drugs, which not only hurt sales, but the company’s reputation. Fortunately, J&J is diversified enough that its many other products were able to compensate for the lost sales. One of J&J’s large divisions produces its medical device product line, which includes heart devices, joint replacements and diabetes treatments. Another large division handles R&D and the manufacturing of pharmaceutical drugs.
The great "Warren Buffett Mutual Fund Company" houses so many businesses and stock positions that it's difficult for analysts to estimate its future numbers. So while it owns Burlington Northern, one of the largest railroads in the country and a company with some earnings predictability, it also owns a number of financial services and insurance operations, for which earnings are less amenable to forecasting. The same is true of Berkshire Hathaway’s exceptionally large stock portfolio, though it includes holdings in many blue ribbon companies.
IBM is now, by many measures, the largest technology company in the world, having surpassed Hewlett-Packard in revenue last year. IBM’s advantages are twofold. The first is that it has diversified well beyond its core hardware base. While mainframes are still among the largest contributors to IBM’s bottom line, the company sold its lower margin PC business to China-based Lenovo a few years ago. The bulk of IBM’s sales now come from high-margin software and IT consulting.
Management has also become adept at controlling costs -- IBM’s second key advantage when it comes to earnings.
Outside of the oil industry, Walmart remains the world’s single largest company by sales. And with nearly 2 million workers, it may also be the planet's largest private employer. The discount retailer’s growth has stalled in the U.S., but that has largely been offset by improvements in emerging markets such as Mexico and China. Walmart plans to try to regain some of its market share in the U.S. by further promoting its low prices, and by opening more modest sized stores in urban areas.
Chevron’s (CVX) 2012 fortunes will rely to a large extent on the price of oil. Most analysts believe that Brent crude will stay well above $100 a barrel this year because of political unrest in Northern Africa, the Middle East and Iran. Demand may also rise because of a slight improvement in GDP in the U.S., as well as ongoing growth in China. Chevron and most of its peers are trading near 52-week highs, a sign that there’s much enthusiasm about the prospects for Big Oil.
JPMorgan isn't as burdened with mortgage-related woes as competitors such as Citigroup (C) and Bank of America (BAC). Its shares have appropriately outperformed those of the other two financial firms over the past six months. JPMorgan’s challenge will be to keep its consumer banking operation healthy, because its investment bank and trading operations are likely to post mediocre results in 2012.
Microsoft (MSFT) is often criticized because of its stock’s abysmal performance in the past decade. But with strong results expected for 2012, its share may see some upward pressure. The Windows PC, Business, and Server franchises are still widely profitable.
The open questions about the company in 2012 are mostly tied to the operations of search engine Bing, and to its mobile smartphone handset business, which is now part of its joint venture with Nokia (NOK).
AT&T’s sales and earnings are a tale of two companies. The company’s wireless business, driven by the increasing use of data application and the expansion of new 4G superfast networks, continues to grow. But AT&T’s plan to further expand its wireless division was thwarted when the government blocked a deal to buy T-Mobile, the number four wireless firm in the U.S. The company’s traditional landline home phone service business, however, has continued to shrink as more people rely on VoIP and cell service.
Exxon Mobil is the world’s largest oil company. Both its refining and exploration operations contribute equally to earnings. Exxon has also begun to move into the lucrative and rapidly growing oil sands business. The new competition in that business is as much from China as anywhere else. PetroChina has begun to aggressively acquire operations in oil sands centers like Canada.
The biggest variable in Exxon’s earnings will be the price of oil. Most experts peg that above $100 a barrel for the balance of the year.
Apple’s earnings and sales growth continue to defy gravity. Apple should continue to hold wide leads over the competition, according to much of the research into the smartphone and tablet PC industry. Apple is able to charge a premium for its products over those of competitors like Samsung and HTC, which drives its impressive gross margins. Apple also stands to benefit from its current low market penetration in developing nations such as China, which will improve as 3G networks are more broadly deployed.