The Most Profitable Company In The World

You can thank the most profitable company in the world for the recovery in corporate profits. More importantly, with asset prices near record highs, just how much are investors willing to pay? Unsurprisingly, the answer is quite a lot, as per a recent CNN Money article:

“Investors are pouring money into unprofitable companies more than any time since the dot-com bubble. This according to a recent report by Scott Opsal, director of research at The Leuthold Group.

Of the largest 1,500 companies by market capitalization today, around 200 weren’t profitable during any of the last three years. But instead of punishing them, investors have rewarded them with a total market value of more than $2.3 trillion. Wall Street hasn’t been willing to attach such high market values to unprofitable companies since the late 1990s. (Even then, the total market valuation of the unprofitable companies wasn’t even half of what it is now.) Of course, if you’re betting on a company becoming profitable in the future, you’re taking a risk.

“You’re going off to these uncharted regions where just about anything might happen,” Opsal says.”

Most Profitable Company, The Most Profitable Company In The World

Such isn’t the first time we have discussed this issue.

Profits Or GAAP Earnings?

In October 2019, we warned of the deviation of the stock market from corporate profitability. To wit:

“If the economy is slowing down, revenue and corporate profit growth will decline also. However, it is this point which the ‘bulls’ should be paying attention to. Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”

Of course, in March, that gap began to close, but the Fed and Government’s massive interventions wound up exacerbating the issue. The updated chart from 2019 shows the problem.

(Click on image to enlarge)

Most Profitable Company, The Most Profitable Company In The World

The bigger problem is the gap between the market and GAAP (actual) earnings. It is improbable that earnings will catch up with the markets even with a jump in economic growth this year.

(Click on image to enlarge)

Most Profitable Company, The Most Profitable Company In The World

While GAAP earnings will indeed recover in 2021, they will be hard-pressed to justify current price levels. Furthermore, analyst’s estimates are always too optimistic which leaves much room for disappointment.

Debt Supported Profits

“A topic not raised in the article, but a frequent theme of ours is the role that share buybacks play in this bull market. Corporations remain the largest buyer of stocks over the last few years. However, share buybacks result in misleading earnings per share data, which warp valuations and makes stocks look cheaper.” – Michael Lebowitz

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