There are three things that will kill the profitability of an industry and the individual companies within it:
- A significant decline in sales. This happened in 2009, when the US experienced the financial crisis that followed the housing market crash. Sales declined -21.9% and operating income plunged from double digits to -16.8% of sales (see the table below).
- A significant increase in raw material costs. This happened in the 2007-2010 timeframe. Copper, gold, and plastics, all important raw materials in the connector industry, experienced a rapid and sustained rise in price.
- A decline in product prices. This occurred in 2008 and 2009, when connector prices declined 5% over the two-year period.
In 2009, the connector industry faced all three profit killers:
- Sales decline of -21.9%
- Raw material costs soared
- Connector prices declined -3.0%
Year 2009 was a perfect storm of profit killers: Operating income declined -16.8%; net income declined -17.0%; return on equity and return on assets were -19.7% and -10.4%, respectively.
In 2010, the industry experienced a complete reversal of misfortune when sales increased +28.5%, raw material prices stabilized, and the industry implemented price increases for the first time in years.
This resulted in a return to high profitability, the historical norm for the connector industry. Operating income soared to 13.4% of sales. Net income was an impressive 9.5% of sales, and return on equity and return on assets increased to a very healthy 12.3% and 6.4%, respectively.
Since 2010, the industry has maintained excellent profitability in spite of modest growth. The reason is connector price stability (no price erosion) and declining raw material costs.
The following table shows the industry income statement (percentage of sales) from 2008 through the first half of 2013. You will note double-digit operating income, near double-digit net income, and double-digit return on equity. You will also note the industry experienced zero price erosion.
No part of this article may be used without the permission of Bishop & Associates Inc.
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