Course 310: Segment Analysis
Profitability Is Key
In this course
1 Introduction
2 Research Revenues
3 Profitability Is Key

While it is important to know how a company's business is divided, it is also good to consider those businesses' profits. For example, Johnson & Johnson JNJ garners a roughly equal portion of sales from its pharmaceutical and consumer divisions, each accounting for about one third of revenues. But because pharmaceutical products tend to be more profitable than mundane products such as Band-Aids, the pharmaceutical division accounted for 69% of total operating profits in 1998. Consumer products, meanwhile, contributed less than 10% of operating profits. As long as a company's maturer business segments are reasonably profitable, there should be no problem. But if a major segment is lagging or showing signs of slowing growth, that could mean trouble. Take Tommy Hilfiger TOM, the popular clothing manufacturer. Investors sent the company's stock down in 1999 after Tommy showed signs that growth from its men's wear line was slowing. The company tried to make up for that slowing growth by turning to other segments, mainly women's wear and children's wear. Regional growth can also be important for companies. Some firms expect to become more profitable as they expand into new areas of the country. Many older companies expand internationally once they're firmly established in the United States. At McDonald's MCD, for example, international operations are growing at a fast clip while domestic operations are growing only slightly. Adding sales in new geographic areas can not only make a company more profitable, it can sometimes protect a company from economic downturns. If one region or country is in an economic slump, another area may be booming and could offset disappointing results elsewhere. Differing economic conditions is one reason why you should consider a company's expansion plan carefully before investing. If a company is hitching its growth plan to a region that is economically depressed, that may be reason enough not to buy a company's stock. At the same time, an expansion into a booming area can drive up earnings and company's share price.

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