US companies feel pinch of globalwoes
Firms find it tougher to grow revenue now than during financial crisis
US companies are finding it more difficult to grow their revenue now than at just about any time since the financial crisis. The secondquarter revenue growth for companies in the Standard & Poor’s 500 index is expected to be just 2.2 per cent compared with an average 7.3 per cent quarterly increase since the fourth quarter of 1998, according to Thomson Reuters data based on Wall Street analysts’ forecasts. Take out the supercharged sales of Apple and the picture is even weaker — with growth of only 1.9 per cent for the current period.
The lowered expectations are a result of the Eurozone crisis hurting demand from Europe, the impact of a slowdown in major developing economies such as China, Brazil and India, and recent signs of weakness in the US. Just last year, S&P 500 revenue growth was in doubledigit territory, at 11.1 per cent in the third quarter following an even bigger 13.6 per cent in the second quarter. Revenue growth in the first quarter of this year came in at 5 per cent.
Slowing revenue growth has wider implications for the US and global economies. Companies are less likely to hire and more likely to fire to curb costs so that they can reach their earnings targets. Secondquarter earnings expectations for the S&P 500 are for growth of 6.7 per cent, and 5.8 per cent excluding Apple.
While the US economy remains anaemic, its relative strength compared with Europe, andthe lackof a bigbright alternative for investment in Asia, may provide some protection for the American workforce when any companies do slash jobs. The savagery of cuts during the financial crisis also doesn’t give many companies a lot of slack to take out.
The USmanufacturing sector is also stronger thanmost other parts of the economy, with S&P 500 industrials’ second-quarter sales expected to be up 6.6 per cent froma year ago. Theweakest sectors are energy, expected to see a 12.6 per cent decline in sales in the second quarter, and telecommunications, seen up 3.2 per cent.
“What we were looking for to happen in mid-year was for emerging markets and Asian growth to bottom out, and that would provide some improvement in revenues in the second half,” said Barry Knapp, managing director of equity research at Barclays Capital in New York. “That’s looking a bit questionable right now. Clearly the biggest trade bloc in the world — the Eurozone — has not stabilised as of yet. The Asian export sector, the weakness you see there, is undoubtedly related to that.”
Even technology companies that had benefited from strong demand in Asia are feeling the pinch. Last week, analysts at JPMorgan Chase lowered their earnings estimates and price targets for Google, online retailer Amazon, and travel web company Priceline.com, among others. JPMorgan noted Google will derive more than 50 per cent of its 2012 gross revenue from international markets. It dropped its revenue estimates for Priceline by 3 per cent for 2012, noting the company gets 60 per cent of its bookings from Europe.
“We still expect to see consensus [estimates] move lower for many names as we approach [second quarter] earnings over the next 6 weeks,” JPMorgan’s Doug Anmuth said.
The trend in overall earnings revisions is not encouraging. The four-week moving average of global earnings revisions turned negative for the first time since March, according to analysts at Credit Suisse. When that happens, the S&P tends to fall 2 per cent in themonth that follows, they wrote.
Estimates may still not have factored in the unstable state of overseas markets, Knapp said. China’s central bank surprisingly cut interest rates on Thursdayfor thefirst time since the global financial crisis.
Among manufacturers though, there have been fewer signs of major stress. At an investor conference last week, officials from big US industrials companies including Caterpillar and 3M said they have not seen a sharp deterioration in European demand — which they had expected to be weak — but stand ready to cut back if things get worse.
3M chief financial officer David Meline said at themeeting, “We have the flexibility should there be a significant downturn in the economy. We don’t believe that to be the case right now.”
US stocks appear to be pricing in more bad news. The S&P 500 index early last week briefly fell more than 10 per cent from its April 2 intraday high, and has been under pressure for more than a month.
The index has recovered some of those losses in recent days, but has seen a big turnaround from the first three months of the year.
“The sentiment level is almost as sour as it was in March of ’09. We don’t have the panic we had in ’09, but I think we certainly have fear and anxiety, and it comes through in looking at what people are doing with their money,” said Hank Smith, chief investment officer at Haverford Trust in Philadelphia.