Power Sheet – June 6, 2016

June 6, 2016, 3:03 PM UTC

The Fortune 500 isn’t a group; it’s a place. Think of it as a 500-story office building with a company on each floor. The building is always full, but the tenants change from year to year. And since we assign companies to floors based on annual revenue, most of the companies that stay in the building have to move to new floors every year. With that image in mind, a look at the brand new Fortune 500 – published today! – reveals important trends in the U.S. economy.

Our building’s tenants, America’s 500 largest companies by revenue, took in about a half-trillion dollars less revenue in 2015 than last year’s tenants did in 2014, and profits were less by about $100 billion, even though the U.S. and global economies were bigger. Total profits were 7% of sales, continuing a profit margin decline from the record 8.9% reached in 2013. And further declines seem likely. The 500’s profit margin has averaged 5.7% over the past 20 years, and I see no reason to expect a secular shift to higher margins. On the contrary, in an increasingly friction-free economy with information costs and transaction costs going to zero, maintaining margins may grow even more challenging.

A related trend: Even though this year’s 500 are in the aggregate smaller and less profitable than last year’s, they’re employing about a million more people. A welcome sign of job growth? Yes, maybe, and no. Yes, because more people working is generally a good thing. Maybe, because we don’t know where those people are; companies report employment worldwide, so the net additions could be anywhere. No, because less revenue and more workers means lower productivity, which is not a scenario for higher pay; the 500’s revenue per employee was $430,000, the lowest since 2011.

Looking more closely at the individual tenants of the 500 building brings a useful reminder of how company fortunes wax and wane and wax again. A truly fascinating graphic shows how energy companies were the No. 1 contributor to the 500’s profits just four years ago, but now they’re in last place, at No. 21, after reporting combined losses of $44 billion. By contrast, financial companies were near the bottom (No. 17) in 2009, but this year they’re No. 1, and three of the four most profitable companies in the 500 are financial firms – J.P. Morgan Chase, Berkshire Hathaway, and Wells Fargo.

But none of those three is the most profitable of them all. The winner by a mile is Apple, which earned a staggering $53.4 billion last year, the largest profit of any company ever. The second-biggest earner, J.P. Morgan Chase, earned less than half that much, $24.4 billion.

Recalling the waxing-and-waning notion, what’s ahead? In April, Apple reported its first year-over-year revenue decline since 2003. Apple, like the energy business and the financial industry and the 500 as a whole, may well continue its long-term upward trajectory. But as all of them have shown and will certainly show again, that road is never smooth.

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What We're Reading Today

The Fortune 500 is here
Doug McMillon's Walmart tops our annual ranking of America's largest companies with $482 billion in revenue. The 500 companies' total revenue equals   two-thirds of U.S. GDP. A number of newcomers include Dan Schulman's PayPal.  Fortune

Sanders campaign split on the future
Hillary Clinton's victory in the Puerto Rico primary over the weekend leaves Bernie Sanders with virtually no path to the nomination. A rift among his campaign staffers pits those who want to continue to the convention and potentially challenge Clinton there against those who think it will be time to step aside and unite the party after tomorrow's primaries in California, New Jersey, and four other states.  WSJ

Cadillac to move to virtual showrooms
General Motors' luxury brand will remove vehicles from some showrooms and instead use virtual reality headsets to showcase cars. The move by Mary Barra's company responds to Cadillac dealerships'  poor performance; the brand sells fewer vehicles per dealer than any other luxury brand in the U.S.  Daily Mail

Oracle lawsuit signals issues with cloud sales
A lawsuit filed in San Francisco by former senior finance manager Svetlana Blackburn argues that Oracle senior management forced her to make the company's cloud sales look better than they were. Larry Ellison's company says  there's nothing wrong with its cloud accounting. An underlying issue with potentially larger implications is that the meaning of "the cloud" can be cloudy. Reuters

Building a Better Leader

Asserting yourself the right way can help your team
It beats being passive aggressive or working behind everyone's backs to make changes. Fast Company

Succeeding as an introverted leader...
…means preparing yourself as much as possible for public appearances, among other things. Fortune

Productivity gains from technology have lagged
It's partly because few companies - representing just 18% of the U.S. economy, says McKinsey - live up to their "digital potential." A doctor's office is a good example. NYT

Worth Considering

Computer error leads to a $190-million mistake at T. Rowe Price
In 2013, as Michael Dell and Silver Lake Partners vied to take Dell private, one of the deal's most vocal critics was T. Rowe Price. But a computerized system that supported management decisions during buyouts accidentally voted the 30 million shares held by the firm in favor of the purchase. That means it will miss out on a $190-million payout (including interest) after a judge ruled Dell underpaid to buy the company. T. Rowe Price is working out how to provide some restitution to investors in its mutual funds that held the shares. Fortune

Treasury Secretary says China's industrial strategy...
...is hurting global markets. Jacob Lew's comment came at the start of an annual discussion between the two countries on security and economic policies. He urged China to reduce production in industries with overcapacity, such as steel and aluminum. The discussions come at a tense time as disputes in the South China Sea continue. MarketWatch

Tony Fadell to exit Nest
Fadell founded the home automation company now owned by Alphabet, Google's parent. While Fadell says the move was in the works for the past year, a number of reports have indicated that Nest has struggled to innovate while employees chafed under his leadership. Marwan Fawaz, former CEO of Motorola Home, will succeed Fadell.  TechCrunch

Fortune Reads and Videos

Mark Zuckerberg's social accounts were hacked
His Facebook page was spared, but not Zuckerberg's Twitter, LinkedIn, and Pinterest accounts. Fortune

Sprint's new pitch-man is known well by Verizon
Verizon's "Can you hear me now?" personality has jumped ship to Sprint and is poking fun at his old employer in new ads. Fortune

China's unemployment...
...could be three times larger than the official numbers say. New research pins the real number at 12.9%. Fortune

Judge rules that the U.S. women's soccer team...
...cannot strike. Five players had filed a complaint over pay that is lower than the men's teams'. Fortune

On this day...

...in 1944—D-Day—155,000 allied troops under the command of U.S. General Dwight D. Eisenhower took control of Normandy's beaches. It was the turning point of World War II.  History

Produced by Ryan Derousseau

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