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Cautious Price Hikes Help Drive Robust Earnings

May 02, 2000|WALTER HAMILTON | TIMES STAFF WRITER

Companies in a range of industries appear to be doing something they haven't done in quite a while: They're raising prices.

That's one reason why first-quarter corporate earnings reports have been so robust, providing support for a troubled stock market.

The price hikes in sectors as varied as chemicals, medical care and beer seem very modest overall, experts say.

And to be sure, for many companies, strong earnings are more a function of hefty sales growth and/or continued cost-cutting and productivity gains than rampant price increases.

Still, economists and Wall Street analysts say anecdotal evidence suggests that some companies increasingly are getting away with price increases for their products or services without alienating customers--a significant turn of events from the recent past.

Many companies refrained from boosting prices in the last several years for fear of losing customers to lower-priced rivals. Those that did raise prices often had to roll them back.

But an April survey by the National Assn. for Business Economics showed the percentage of firms raising prices in the first quarter to be the highest in four years.

More telling, a whopping 94% of price hikes have stuck.

"The message here is that the era of price declines and the era of [downward] pricing pressure has ended," said Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter in New York.

Blistering profit growth would seem to back up that idea. First-quarter corporate earnings are likely to rise about 24% over the year-earlier quarter, according to Thomson Financial/First Call.

That would be the best since the 25.2% registered in the fourth quarter of 1993.

There's little doubt that the same powerful forces that have driven profit growth throughout the 1990s--including improving productivity and a surging U.S. economy--are primarily responsible for the first-quarter results. A pickup in growth in Europe and Asia also is helping.

But because profits "are a lot stronger" than even last year's boiling-hot performance, "something different is going on out there that is lighting up earnings," said First Call's research director, Chuck Hill.

Though few companies specifically point to price hikes as a bottom-line factor--it's not politically correct to say so, after all--Hill suspects that increased pricing power is having an impact on earnings.

"It's more anecdotal than a real movement starting, but we weren't seeing anecdotal [signs] before," he said. "We're on the verge of seeing pricing power emerge in a meaningful way."

Though it may seem counter intuitive, pricing power is a mixed blessing for investors.

On one hand, many investors may want to own shares of companies that can raise prices because those firms would seem to have an edge in improving revenue and earnings.

On the downside, however, some companies appear to be raising prices because they're faced with rising labor costs and have no other way to maintain profit margins.

Indeed, the government's report last week on first-quarter wage and benefit costs showed the biggest gain in a decade.

"The price increases are very measured and very cautious," said Gary Schlossberg, senior economist at Wells Capital Management. "The environment remains very competitive, and I don't know that businesses are jumping for joy because many of the increases are simply meant to counter cost pressures."

Other companies have faced higher raw-materials costs, particularly for energy, as oil prices have surged over the last year.

Shippers such as Federal Express have increased prices in part because of oil prices, said Paul Kasriel, chief economist at Northern Trust Co.

But manufacturers on the whole have simply swallowed the added shipping costs, he said. "You've not really seen the pass-through into the finished-goods prices," he said.

Of course, if corporate pricing power were to become widespread, it could be disastrous for the economy--signaling resurging inflation across the board.

Federal Reserve policy makers, who have already raised short-term interest rates five times since June, could be compelled to raise rates sharply to slow the economy if they believed that upward pressure on prices was broad-based.

But is that what's occurring? Economists disagree.

At Merrill Lynch & Co., an in-house indicator based on various economic statistics shows inflation picking up at its fastest pace in two decades, said Rich Bernstein, head of quantitative analysis.

But other economists believe inflation overall will remain subdued. Many note, for example, that crude oil prices have slumped from first-quarter peaks as major exporting nations have boosted production.

In a survey reported Monday, manufacturers nationwide said they continue to pay more for many raw materials, though the increases moderated from March levels.

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