"You Only Get To Miss Sales Expectations So Many Times"

Tyler Durden's picture

With the Q4 earnings season beginning, ConvergEx's Nick Colas reminds that the top of the income statement matters more than the bottom line if we expect further upside to domestic equities in 2014.  Revenue growth has been in short supply over the last four quarters, with the companies of the Dow only able to average a 0.6% top line growth rate over the last year.  If 2013 was all about multiple expansion in equity markets, then, Colas warns this will be the year when revenue growth must fulfill the promise of a U.S. stock market so near all-time highs. Analysts have been perennial over-optimists on revenues every month since early 2012. Maybe they finally have it right, but that is purely a matter of faith at this point; their track record on this count is not good.


Via ConvergEx's Nick Colas,

The Ford Mustang turns 50 in just a few months, but this storied Baby Boomer icon of a car almost never made it into production.  In the early 1960s Henry Ford II, grandson of the Ford Motor Company founder, had just watched the Edsel become the most celebrated flop in automotive history.  It was overpriced, overhyped, launched with poor quality, and suffered from questionable styling – especially its “Toilet seat” grill.  Worse of all, it bore the name of Ford’s own father and “Hank the Deuce” wanted no part of another high profile vehicle launch.  The only thing that kept the Mustang program on track at Ford in 1962-1964 was Lee Iacocca’s constant promotion of the car.  He convinced Henry Ford II that the car was the right product for younger buyers and would use largely off-the-shelf components to keep costs low.

In a recent – and rare – interview with Jay Leno (quoted in the 1/6/2104 edition of Automotive News), Iacocca talked about this now-fabled American sports car and revealed a provocative nugget of information.  Here is what he said, prefaced with a little background:

The basic story is well-known in automotive circles: the original Mustang’s base price was an affordable $2,400 out the door of the dealership and over the first 2.5 years of production Ford sold +1.1 million units.


What Iacocca revealed to Leno about these early cars tells us something new about how profitable they were: customers ordered $1,000 of options, on average.


The contribution profit margin for a passenger car of the day was about 30%, but options typically carried a 60-70% margin.  Using Iacocca’s anecdote, that made the average profit per unit about $1,370.


In the 1966 model year, Ford sold 607,000 Mustangs and - using the profit analysis above - made about $830 million pretax.  That translated into $5.8 billion in 2013 dollars, using the Bureau of Labor Statistics’ CPI Inflation Calculator.


Analysts estimate that Ford made $10.8 billion in EBITDA in 2013, which means that the Mustang’s inflation-adjusted profits from 1967 are the equivalent of more than 50% of the company’s earnings power today.  Not bad for a car that almost got canceled.

That’s the power of marginal revenues, both from new products and higher incremental profit margins, and how they can create explosive earnings growth for the company that is smart/lucky enough to have them.  It is also a story which has been in short supply since the initial economic snapback from the Financial Crisis.   Every month for the last few years we’ve tracked both analysts’ expectations and actual revenue growth for the 30 companies of the Dow Jones Industrial Average, and here is a summary of our latest findings:

The just-completed year of 2013 may have been an excellent one for equities, but it was the worst year for corporate revenue growth since the Great Recession.  Assuming that analysts have dialed-in their expectations correctly for Q4, the average year-on-year sales growth for the Dow companies was a paltry 0.6% last year.  Double digit growth did occur – back in 2010 – but that was admittedly against the easy comps of 2009.  Since then, even the mega-names of the Dow – generally well run companies – have had real trouble growing their top lines.


Analysts may have set the Q4 2013 low enough so that we might get some upside surprises as earnings season progresses over the next few weeks.  Back in March 2013, the Street thought that the Dow companies could grow revenues by 4-5%. As the year progressed a sluggish global economy poured cold water on those hopes.  Estimates now run 1.5% for the Dow companies, and 1.6% for the non-financial names in the Average.


According to their currently published revenue estimates, brokerage analysts expect revenue growth to accelerate from here.  For Q1 2013, that 1.5% Q4 comp becomes 2.5%.  Then, in Q2 2014, that grows to 3.0%.  How about Q3?  Yep, more growth, to a 4.2% comp to last year.



At the same time, you might look for a salt mine to accompany these estimates, for our tracking of past analyst modeling shows they are prone to excessive optimism.  The now-unimpressive Q4 comp to last year of 1.5% began its life a year ago as a 3.4% expectation.  It peaked in March as a very brave 4.6% expectation.  From there, it slowly crept back into its shell and shrank to its current size.  Which is to say very small indeed.


The contours of this year’s quarterly revenue growth expectations are following those of the current quarter.  They coming out swinging in the early rounds, only to be pummeled back into their corner by the brutish form of a global economy barely able to get out of its own way.  For the first quarter of 2014, analysts were printing a 4.5% expected comp in May 2013.  As mentioned, that has shrunk to 2.5% in less than a year.  And that 3.0% growth rate in analyst models for Q2?  It was a much more impressive +4% comp in October.


Interestingly, the Street has not yet cut its full-year revenue expectations for 2014.  These still remain at 3.8%, close to where they started life in late 2012.  If you want to know how an analyst can cut their quarterly numbers every month but keep their annual expectations the same, I don’t have an answer for you.


To paraphrase a Ford marketing message (although not directly from the Mustang), revenue growth has to be “Job 1” for stock markets and the companies they track in 2014.  Last year’s market, with its above-average gains, didn’t come for free.  If investors want to see further advances – or at least the maintenance of current levels – then revenue growth and its attendant improvements in profits must be part of the picture this year.  It is easy to pick on analysts for their wayward estimates.  Truth be told, it is actually kind of fun.  But inside those numbers sit a fidgety truth: you only get to miss sales expectations so many times before investors grow inpatient.  Equity investing may be an optimist’s game, but it is not supposed to be a sucker’s bet.  This year must deliver on the promise laid out in last year’ stellar investment results, and it must do so both at the bottom AND at the top of the income statement.   

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Possible Impact's picture

Ford should hire Amazon...  :)

Id fight Gandhi's picture

Yeah, no kidding. I'd like to showroom browse a new car, then buy it cheaper online from a place that operates at a loss.

TheRideNeverEnds's picture

Hey now, they can make a profit but they just don't want to right now. 


Anyway, they will make up for it in volume....

new game's picture

or running out of people to lay off! program the robot to turn off the lights...

think a robot can work 29.5 hours per day?


future fubar folks


czardas's picture

This Tyler conveniently omits that most companies are still making money which is why the market continues to climb.  You can't  have it both ways - condemn the Fed's action as totally ineffective then claim that those actions are pumping the market.  (I fall into the "more actions / less effect" side.)  The driver of the market has always been profits and as others have noted, productivity keeps rising as people are replaced by machines who won't take smoke breaks.

caShOnlY's picture

I'd like to showroom browse a new car, then buy it cheaper online from a place that operates at a loss.

oh, you mean the GM/Sheen business model:  Winning, while losing.  


q99x2's picture

Maybe accounting numbers mean something because if a company doesn't have money to keep running it won't. But maybe not.

Oldwood's picture

They are obviously Too Big To Fail. They still haven't cashed in their "get out of bankruptcy free" card yet.

NoDebt's picture

The only way you're getting revenue growth while both workforce participation rate and incomes (for those lucky few who still have jobs) continue to fall, is by underestimating inflation and counting much of the nominal increase as "real".

For that miracle, I present you...... government statisticians (US Commerce Dept).

the not so mighty maximiza's picture

its a fuckin shit show, these Phd, MBA, master degree clowns will get poop on their faces in the end 

FreedomGuy's picture

What I like about elitists, who are most often leftists is that they often start by telling you how smart they are and lead with their degrees. They usually have never actually done anything and probably cannot even change a tire but they know how to plan out the universe.

In my life, most the truly intelligent people never have to tell you.


Oracle of Kypseli's picture

That reminds me:

A guy asked a father to marry his daughter.

What are your qualifications?

I have a BS an MS and a PHD. He stated proudly

But you don't have a J.O.B. Have a nice day

knukles's picture

No no no no no 
You guys don't understand the math

See, P/E is the game, right?
So when E gets real teenie tiny, then the P gets real big.
Simple division.

Fucking Goldman Bound, I Am, Goldman Bound.

Squid-puppets a-go-go's picture

epic failanalysis, colas

did zimbabwean sales increase at any point during its stock market's hyerinflationary reflection of its currency? no. equities can and will rise no matter how shit the data

eclectic syncretist's picture

Anyway, estimates are already universally unimpressive across the board.  Is there a single DOW company expected to increase revenues by 10% in 2014?  Most of them are currently expected to increase revenues by no more than ~5%.  That means that in order to increase earnings further they'll have to, guess what, cut expenses, meaning more job losses.

Oldwood's picture

So the question is, does it cost more to pay people todo little or just pay unemployment? Once a business becomes large enough that people work together and still don't know each other's names, economics is just math. People want respect but math only respects numbers. The world that many of us want is one of small business and small government.

ebworthen's picture

So you're saying we are back to 2008?

Bullish for bailouts.

starman's picture

a bucket of water is still. a bucket of water even  after you piss in it 

Manipuflation's picture

I am a muscle car guy and the Mustang was not that great unless it was a Shelby.  It is still a nice looking car and all but it was not Ford's best car.  Ford built a lot of Mustangs with 6 cylinders.  Ford also built a 429 Boss and stuck that engine in a few of the Mustangs... but very few.  The Mercury Cougar had a lot more going for it at the time with a 390 block and a six pack of carbs:  It could kick some ass.  Ford also made the 289 small block engine which boasted "one horsepower per cubic inch" and it was true if you had the right aspiration.  Great engines.

I am not a Ford guy but they did build some cool stuff.  Chevrolet/GM built the 409 and 427 big blocks and backed them up with the nearly indestructable Turbo 400 transmissions.  For as big as GM is/was, they did not stick these engines in everything they made.  GM was making so many engines at the time that they might have lost track of what they doing correctly.  i.e. the 400 small block.

Not to be outdone at the time was mopar.  They said to themselves "fuck it, we will build a different engine at all costs." and that they did with the 440 and 383 both of which are badass blocks.  More importantly they came up with the more efficient 426 Hemi design that generated even more horsepower.  Remember the Dodge Charger?

I am a Pontiac guy but I have admit that all of those old cars are cool as fuck because they tell a story.  I had 1969 Pontiac Tempest that I juiced the Pontiac 350 engine on with some Edelbrock and a big Holley and boy would that huge hunk of American steel fly...to the point where the front tires were coming off the ground due to the wind resistance. 

FreedomGuy's picture

I saw that episode of Leno's garage and it was interesting. Old Lee was in need of a major rebuild himself but it was good to see him. People forget that he was also the force behind the minivan, specifically the Dodge Caravan that revived Chrysler. The guy knew his stuff. I believe he was an engineer but worked from the sales floor up to the top.

Given that corporations are still top-down military style organizations there is no substitute for someone who knows their stuff and has the right instincts.

Now, let's talk about our current leadership in the good ole USA...

Oracle of Kypseli's picture

For a model to succeed you need more mystique and cult like following than muscle, looks, brand or other. Very difficult to create.

Finding the right chord to induce emotion to the public at large with an object may be more of a hit and miss than creativity. The latter helps a lot however.

Mustang, Lotus Elan, early Porsches and several others did that. On the other end of the spectrum to satisfy contemporary American vulgarity and narcisism "the Hummer"  

new game's picture

can you see detroit on a clear day-hey delorean, another visionary, but hey a little too much blow will cloud any vision eventualy, but was a good ride...wonder wtf he is doing?

Oldwood's picture

Thats why marketing rules the world! When there is nothing new under the sun you must make people see what used to be everyday, mundane or even ugly as new and exciting. I wish they could talk to my wife about me!

Fuh Querada's picture

I'd like to "get to Miss Sales Expectations so many times " - is she hot?