After five years of explosive market performance that left the Dow Jones industrial average bobbing near the 10,000 mark, the question from Wall Street to Main Street is the same: Can it last?
Without access to a crystal ball, we can say only that the future is uncertain. But this year's Star Tribune 100, our annual ranking of the state's 100 largest publicly held, Minnesota-based companies, highlights some stratospheric five-year market value comparisons and some sobering year-over-year trends that, some say, suggest the party may be about over.
Overall sales for the ST100 rose a solid 8.87 percent, slightly better than last year's 8.1 percent increase. (Companies on the list are ranked by revenue.)
But profits are another matter. Income for the ST100 was down 14.3 percent. That compares with a 16.9 percent increase a year ago.
Yet Wall Street doesn't seem concerned with the earnings gap. Investors continued to bid up valuations nationally and in Minnesota, where the market capitalization -- shares outstanding multiplied by share price -- of the ST100 rose 16.4 percent.
One occurrence in 1998 explains part -- but not all -- of the ST100's weakening profit picture. The August-September pilots strike that grounded Northwest Airlines Corp. led to the carrier's $285 million 1998 loss, vs. a profit of $606 million in 1997.
So, you might say, if not for the strike, profits would have been up, right?
Wrong. If Northwest had posted the same earnings as it did in 1997, ST100 profits still would be down about 10 percent.
But there is one significant caveat: The population of companies in the ST100 changes every year as companies join the list, drop off or relocate their headquarters out of state. Last year, Norwest Corp., once Minnesota's largest bank holding company, acquired California-based Wells Fargo & Co. and relocated to San Francisco. If Norwest (now called Wells Fargo) had kept its headquarters in Minnesota and if Northwest pilots hadn't struck, profits for the ST100 would have risen about 10.4 percent.
But if the ST100 is a bit more pale for Norwest's departure, there is no reason to feel sanguine about a 10 percent earnings increase, which still is considerably slower than 1997's jump of nearly 17 percent.
Combine declining earnings (or flattening earnings, if you prefer) to the sharp rise in market valuations and you have to wonder how much longer this bull can run.
On March 18, Wall Street valued medical-device maker Medtronic Inc. at $40.5 billion, yielding a stunning 731 percent increase in just over five years. Dayton Hudson Corp. was valued at $30.7 billion, up 553 percent from the $4.7 billion price tag the market put on the retailer at the close of 1993.
Meanwhile, 3M Co., which has led the market cap category for as long at the ST100 has been keeping score, slipped to No. 3 at $29.6 billion as it continued to struggle with weak sales in Asia and Latin America compounded by foreign currency losses.
The phenomenon of rising stock prices amid weaker earnings performance is hardly unique to Minnesota, investment professionals and economists say. Witness the strong market gains earlier this month amid a trickle of disappointing earnings reports and a stream of notices from companies that they won't meet analysts' earnings forecasts.
"Can this continue?" asks Peter Anderson, chief investment officer for American Express Financial Advisors. "That goes back to the issue of what interest rates are going to do. Interest rates have declined sharply, and that has resulted in a significant improvement in market valuations."