The stock market may have been a profit machine since the financial crisis, with the FTSE 100 almost doubling since the lows of March 2009 when it languished around 3,500, but UK companies haven't been so profitable. Happily, that's about to change.
New research shows that the outlook is now improving with UK companies on course to reverse a long period of falling profits. However, you may have to look beyond familiar favourites in the FTSE 100 if you want to share in the next leg of the profit surge.
The latest Profit Watch UK from The Share Centre analyses FTSE 350 companies that reported their annual results between July and September, and found two-thirds reporting rising sales, with the average up 9.1%. UK plc operating profit climbed 7.4% with well over half reporting healthy growth, although three-fifths did so at a lower margin, as profits rose more slowly than sales. Housebuilders did particularly well, with their revenues increase on the back of a strengthened property market.
These figure exclude mining giant BHP Billiton, whose troubles have blackened an otherwise bright picture, as it reported a £4.9bn pre-tax loss. The troubled mining sector posted total losses of £17.1bn as companies struggled to cut their fixed costs in line with falling revenues.
This is a world away from the £49bn profit they posted in 2011 but The Share Centre suggests the mining sector may now be ready to fly again as commodity prices strengthen. The miners weren't the only companies to suffer reversals, Sky and Diageo also booked lower exceptional income than in 2015.
Smaller is beautiful
Mining stocks aren't the only big boys to find the going hard. Other multinational companies also struggled, notably in the oil and gas, and banking sectors. However, Helal Miah, investment research analyst at The Share Centre, reckons FTSE 100 performance should revive once the impact of the devalued pound feeds into company results, as this should boost the value of their overseas profits.
The FTSE 250 has been the real star. With lower exposure to global headwinds and troubled sectors, mid-caps have yet again posted stronger revenue and profit growth than their large-cap peers. Mid-cap sales rose 11.2% on an adjusted basis, compared to a 6.7% fall among the top 100 companies. Profits showed a similar pattern. FTSE 250 companies have been insulated from global volatility, with far less exposure to the troubled energy, banking and mining sectors. This could change if Brexit undermines the UK's relative economic strength, and companies exposed to British consumers could trail those with international earnings streams.
Some sectors will always do better than others. Financials may continue to struggle, particularly if British banks lose EU passporting rights, and pharmaceuticals could be hit by greater generic competition. However, with returns on cash near to zero, and the prospect of a Trump presidency threatening to burst the 30-year bond bubble, the fact that the UK's major companies are still piling on the profits is something to celebrate.
Brexit remains a wild card in this. So far its impact has been relatively small but that may change when Prime Minister Theresa May triggers Article 50.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Diageo and Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.