A solid majority of the S&P 500 have now filed their third-quarter 2018 numbers, so you know what that means: another look at whether cost of revenue and SG&A costs are accelerating faster than revenue.
Calcbench began studying that question earlier this year amid trade wars and tight labor markets, to see if those pressures were outpacing revenue growth. From time to time they were outpacing revenue, which consequently must lead to a decline in operating income. That pressure could also explain some of the stock market decline we’ve seen across 2018.
Overall, the third quarter looked much better for large companies. We examined the filings of more than 360 of the S&P 500. The bottom line: revenues up briskly, expenses up modestly, and therefore operating income rose a pleasant 12.2 percent compared to the year-ago period. See our nifty chart, below.
That said, the devil remains in the details. In our sample of 361 companies, 148 of them had the cost of revenue growing faster than revenue overall, and 158 had SG&A costs rising faster than revenue overall. So while the collective picture might look good, financial analysts will still find plenty of specific companies where the direction of revenue and costs does not look good.
And for those who need a reminder — why are we doing this at all?
Because if costs rise faster than revenue, operating income falls. In theory, companies facing that predicament could still please the Wall Street gods with good net income thanks to certain outside factors, such as last year’s huge corporate tax cut. That’s exactly what we saw at the start of this year when companies reported 2017 numbers.
The problem: for many companies, that tax cut accounted for most of their growth in net income. The feel-good high from that one-time injection to the income statement is long gone. Congress won’t be cutting corporate taxes again this year.
So now companies need to boost net income the old-fashioned way, by generating revenue and controlling costs. They need to do that just as several new outside factors — tariffs and a tight labor market — make controlling costs more difficult. So increasing revenue becomes more important.
Right now it seems like plenty of companies are navigating that path well enough. Then again, plenty of other companies aren’t.
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