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Daily Spotlight: Profit Margins Widened in 1Q

In Business
May 15, 2024

Summary

First-quarter earnings season is winding down as the retailers wrap up their reports. The overall growth rate is set to land in the 7%-8% range. That’s not bad — and the rate would be higher (above 10%) if pharmaceutical company Bristol-Myers Squibb didn’t take a substantial charge related to an acquisition. There are three drivers to EPS growth: higher sales, a wider operating margin, and a reduced share count. A decline in shares outstanding, which is the result of corporate share buybacks, is the lowest-quality driver of EPS growth. Higher sales — as customers demand and pay for more products and services — is the highest quality, especially when sales totals are driven by an increase in volume. (First-quarter revenue growth was about 4%.) Margin management is in the middle. Consistently wider margins, quarter after quarter, are often a sign of a good management team, which is more often able to grow revenues faster than it grows costs. But that’s a tall order in periods of high inflation (which raises the prices of Cost of Goods Sold) and of high interest rates (which result in higher financing costs). What’s more, there’s a

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