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The Problem With The Forward EPS Hockeystick: Millions Of Americans Are About To Lose Their Jobs

Tyler Durden's picture




 

Back on September 30, Q1 2015 earnings were expected to grow by 10% from a year earlier. A few short months later, Q1 EPS (non-GAAP of course) growth was revised to 4%. It currently stands at -2.8%, a number which as we reported a month ago, is the biggest annual drop since 2012. What is the reason for this collapse in EPS?

There are two.

First, plunging crude prices, which after rebounding from the low $40s, have since posted a modest dead cat bounce to the upper-$40s, but are nowhere near enough to allow quarterly EPS growth to resume its historic pattern of growing in the high single, low double digits. The devastation that has resulted in the Capex of the shale sector including the already ramping up layoffs of energy workers, extensively documented here, needs no further commentary.

Second, the surging dollar has led to a drubbing for corporate profitability, and one needs merely to glance at some of the earnings call transcripts of the multinationals to realize just how much of an impact the strong USD has become. 

  • “Finally, we do see currency as a continued headwind. We factored into our guidance the headwind of approximately $0.15 to $0.20, which was roughly the same rate of devaluation we experienced in FY 2014.” –Monsanto (Jan. 7)
  • “Before I share with you some of the highlights from the quarter, let me provide some background on the impact to our business from the volatile foreign exchange rates. Nearly every currency we do business in weakened against the U.S. dollar when compared against Q3 last year, last quarter or against guidance…These rate changes negatively impacted both the income statement, where we use an average rate for the quarter and the balance sheet, which is translated using spot rates at the end of the quarter. For instance, total revenue would have been $13 million higher using Q3 rates from last year, a $11 million higher using rates from last quarter, and $3 million higher using the rates given in September for guidance.” –Red Hat (Dec. 18)
  • “Turning now to revenues, net revenues for the quarter were $7.9 billion, an increase of 7% in U.S. dollars and 10% in local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter.” –Accenture (Dec. 18)
  • “Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $310 million or up about 7% from the year-ago period…Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for this segment this fiscal quarter.” –ConAgra Foods (Dec. 18)
  • “And as I mentioned, foreign exchange lowered reported sales by 2 percentage points.” –General Mills (Dec. 17)
  • “The as reported numbers were heavily impacted by the strengthening of the U.S. dollar in comparison to other currencies. Total revenue saw a 4% currency headwind which would double what it was at the time of my guidance.” –Oracle (Dec. 17)

The problem is that, as noted above, the bounce in WTI has since peaked and after hitting the low $50s, is once again on the way down, suggesting even more pain for the energy complex. Furthermore, with the Fed widely expected to hike in the summer even as 20 central banks around the globe have eased in just the past two months, the dollar is hardly expected to weaken materially at least until the Fed reverses course on its tightening intentions, which may take a significant period of time.

So what does all that mean for EPS, forward multiples and the market? In one word: hockeystick. In two words: epic hockeystick.

The chart below is from the latest factset earnings insight, and it shows that after sliding 2.8% in Q1, earnings are expected to soar dramatically, posting unprecented Q/Q growth, and return to growing at 7% clip in the fourth quarter.

There are three problems with the above chart.

  • First: as mentioned earlier, it assumes that both crude oil prices, and the USD return to a trendline normal level. For now, neither of these appears to be even remotely feasible.
  • Second, the assumes a return to trendline growth even as sales growth for all of 2015, a topic we discussed previously, is now set to post its first annual decline since Lehman.
  • Third, the only way declining sales can be transormed into EPS growth is through a new round of profit margin growth. There is one problem with that. This:

Net S&P500 Margins, as tracked by Factset, just posted their biggest decline since... Lehman.

So what happens if one adjusts the Wall Street consensus forecast, something which will happen anyway sooner or later once the "priced to perfection" forecast fails to materialize? We have shown one model forecasting what happens to Y/Y EPS growth if one assumes the same annual decline for the rest of 2015 as took place in Q1.

This is the visual result:

 

Adding up the forecast quarter, means that non-GAAP EPS in 2015 will be 115 instead of 120, suggesting the forward P/E multiple is not 17.6x where it ended at close of trading today, but 18.4x, by far the highest since Lehman, and also it would imply a GAAP EPS of 20.2x: in other words, the market is, using real earnings, already trading above the magical "David Tepper" bogey of 20x!

But let's assume the Wall Street consensus is right, and instead of dropping by nearly 3% every quarter, earnings regain their stride even as sales decline for the full year - something which even Wall Street now admits will happen.

What needs to happen? Well, net margins have to go from merely ridiculous levels, hugging the 10% number - something they have never managed to achieved in the past - and rise to an absolutely mindblowing 11% by the end of the year.

Visually, this would look as follows:

And with all variable costs already trimmed out of existence in the past 5 years, this can mean only one thing - millions more in layoffs, especially if the companies that comprise the above sample are also eager to maintain their record pace of corporate buybacks: something they would be unable to do with the residual cashflow that lower sales generate.

In other words, yes: the S&P may well be "fairly priced" here, if one assumes an 18x (rounded up) forward P/E multiple to be fair - a number which is above the prior 5-year average forward 12-month P/E ratio of 13.6, and above the prior 10-year average forward 12-month P/E ratio of 14.1. It is also above the forward 12-month P/E ratio of 16.2 recorded at the start of the first quarter (December 31).

And in order to achieve that, not much has to happen: instead of hiring millions, America's corporations just need to fire about 2-3 million people in order to extract the kinds of net margin efficiencies that are already priced in!

Which can only mean one thing: the BLS is going to be very, very busy coming up with seasonal adjustments, scapegoats, and pro forma justifications over the next 9 months to mask the fact that as the S&P continues to rise to record levels, and as the underlying corporations fire in droves, and present a picture of a stable and growing US economy, one which is, at least in C:\BLS\models\labor\payrolls\goalseek.xls adding some 230,000 seasonally-adjusted "workers" every month.

Source: Factset

 

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Mon, 03/02/2015 - 19:00 | 5847405 RafterManFMJ
RafterManFMJ's picture

Yup.

Already decided, I lose my current job of 16 years, it's straight to welfare; we'll ride that EBT right into the collapse.

Sadly, my fervent desire, insane fearlessness in the face of headcount reduction makes our corporate head cutters queasy about giving me the boot.

Bastards.

Mon, 03/02/2015 - 19:09 | 5847458 knukles
knukles's picture

The robots are coming.  Ya'll ain't seen nuffin', yet.  Ned Ludd was right.

Mon, 03/02/2015 - 19:25 | 5847517 max2205
max2205's picture

Yeah, that's the ticket  

Mon, 03/02/2015 - 19:31 | 5847528 stant
stant's picture

Are ther going to be robot plumbers ,auto mechanics electricians etc or is moot because no one will have money to pay them? I guess float shrink only goes so far ,then The pink slips

Mon, 03/02/2015 - 20:41 | 5847789 RaceToTheBottom
RaceToTheBottom's picture

Robot MBAs.....Opppps, already got them...

Mon, 03/02/2015 - 19:45 | 5847597 rsnoble
rsnoble's picture

The robots will keep coming as long as profits go up.  Eventually the full-circle comes around leaving the new generation of business wondering how the greedy fucks of yesteryear couldn't had seen this coming?

They did see it coming. Don't care.  Make all you can make now.  Hand off problems to others.  The American way.

Mon, 03/02/2015 - 20:03 | 5847671 847328_3527
847328_3527's picture

Lucikly, the Houston economy has diversified into health care which some say will save the day:

 

Houston hospital system files Chapter 11 to restructure

 

 

http://www.bizjournals.com/houston/news/2015/02/27/houston-hospital-syst...

 

... ooops!

Mon, 03/02/2015 - 19:25 | 5847519 EBT excepted
EBT excepted's picture

if'n u need some hep, gib me a hollah...cuz d' disbilitay be good too...

 

gold fo' d'peepses...'n' a hunned dollah beel...yo' be nigro rich...

Mon, 03/02/2015 - 19:43 | 5847585 Bemused Observer
Bemused Observer's picture

You do whatever you have to do, my friend. No one who understands this crap would blame you. There ARE no 'rules' anymore, and moral hazard has no meaning. Taking advantage of any 'free money' one can get in order to survive is NOT leeching off the system...it's fucking self-defense for a lot of people! If the system has been set against you, you are morally entitled to do whatever it takes to defend yourself, even to turn its own weapons against it.

I would not be outraged anymore to learn of people who deliberately took on loans and used them to buy something of value, with no intention to repay. Or of people taking student loans and using them to live on instead of going to school for some worthless degree. Or of people setting up phony businesses to play tax games, or learning to 'hack' computers and screw around with ATM's...

It no longer means anything, the system has lost all claim to moral authority over anyone. TPTB can only weakly appeal to the authority of individual conscience and some sort of religiously-based notion of personal responsibility to force compliance. But since they are the biggest violators, it is falling on deaf ears, and more people are saying, "Fuck THIS, and fuck YOU! I'm TAKING mine!"

Mon, 03/02/2015 - 19:53 | 5847634 rsnoble
rsnoble's picture

I've been preaching what you just said for quit awhile now.  I'm a firm believer in shit roles down hill.  Our system in the US is corrupt beyond repair at the top.  This all rains(no, not trickles) down on us.  And then we have a bunch of local fuckhead slave masters that expect us to behave and live under some set of bullshit rules.  Rules that don't fucking work because it's impossible to stay in line with them when everything around you is being dismantled by greed.

Don't get stupid about it though........avoid jail at all costs.  Walk the line as long as you can. I have a feeling a whole shitload of people are going to be falling off that line right about the same time before long.

Mon, 03/02/2015 - 19:57 | 5847646 rsnoble
rsnoble's picture

For example........cunts like Hillary Clinton throwing gazillion dollar weddings for their satan's spawn etc etc etc.  This fucking joint is nothing more than medieval times digitalized.  

Mon, 03/02/2015 - 20:43 | 5847797 RaceToTheBottom
RaceToTheBottom's picture

But, money does not matter to Chelsie's and her baby bangster huubby.....

Mon, 03/02/2015 - 21:50 | 5847994 Handful of Dust
Mon, 03/02/2015 - 22:19 | 5848068 Realname
Realname's picture

How dare you impugn the name of Satan by associating him with a Clinton.

Mon, 03/02/2015 - 20:34 | 5847770 Sanity Bear
Sanity Bear's picture

I used to be staunchly opposed to ever 'taking a handout', until I realized that the moral imperative only applies to the context of an honest system.

Mon, 03/02/2015 - 22:57 | 5848159 one_hundred
one_hundred's picture

One year ago,after i quit my work-desk job , i’ve had some good luck to stumble upon following amazing freelance job on-line which saved me… They offer online home-based jobs. Last check after doing this job with them for four months was $10k… Awesome fact about the job is that the only thing required is simple typing skills and reliable internet… LEARN MORE HERE... www.globe-report.com

Tue, 03/03/2015 - 21:25 | 5852226 TheRedScourge
TheRedScourge's picture

You may be surprised to learn that you can only really stay on welfare indefinitely if you have kids. Also, you don't qualify if you have any savings. So while you can do that, you'll be entirely dependent on the system, and it may very well all come apart during your lifetime.

Mon, 03/02/2015 - 19:10 | 5847462 cornfritter
cornfritter's picture

Didn't I read an article on here (or possibly somewhere else) that the BLS would not be publishing stats anymore?  Getting old, I may have imagined that.

Mon, 03/02/2015 - 19:58 | 5847649 rsnoble
rsnoble's picture

LOL what difference do fudged stats make anyway?

Mon, 03/02/2015 - 19:12 | 5847471 optionwriter
optionwriter's picture

Blah blah blah as long as the federal reserve and the bankers want the market to go up...up it will go....end of story...no free market here...move along

I have believed the Tyler's for years collapse,default, debt.....blah blah blah.

Mon, 03/02/2015 - 19:23 | 5847510 J Pancreas
J Pancreas's picture

Lulz. Thats pretty much the attitude most people had when Netscape IPO'd, WorldCom's M&A spree, or when homebuilders were at 40x earnings. The market will correct, always does. I agree on the no free markets pertaining to price discovery - thanks to .gov's primary blowjob queen Yellen and ZIRP the markets pricing mechanism is broken when money is free.

Mon, 03/02/2015 - 19:31 | 5847534 u8mapwho
u8mapwho's picture

Totally agree. Day day out same drivel about coming crash. I will believe it when i see it. Until then this is just boring. Market goes up, MSM argues why it should and Tyler says it should not. Yawn.

Mon, 03/02/2015 - 23:24 | 5848213 Policraticus
Policraticus's picture

I may be wrong, but I think the Roman Senate had a similar view.  I guess I should feel good that I was born in a more advanced and enlightened age.  A time when we have learned from history, and do not need to fear we are making some of the same mistakes of gernerations whom have long since been reduced to dust.  After all if MSNBC is saying they see nothing but green shoots, then by God let there be green shoots. 

We never learn from what we refuse to study.  We can never repeat mistakes from the past, if we can claim we are ignorgant of the past.

Mon, 03/02/2015 - 19:19 | 5847495 adr
adr's picture

I paid more for heating oil than I did in September. That is fucked up.

Mon, 03/02/2015 - 19:29 | 5847522 Sorry_about_Dresden
Sorry_about_Dresden's picture

Long Molotov's cocktails!

Low gas prices are good for setting riot police on fire.

The Greeks have it perfected this art. I saw them set the riot police on fire....they burned like candles.

Mon, 03/02/2015 - 19:27 | 5847524 yogibear
yogibear's picture

CNBC will spin job loses as being a good thing.

It is good for profits though. 

Mon, 03/02/2015 - 19:55 | 5847637 Money_for_Nothing
Money_for_Nothing's picture

1. CNBC will be laying off too. 2. Most places are at minimum employees. Any more out-the-door and they lose from not being able to control their stuff. You don't own it if you can't control it. I see reduced hours. Maybe they will go back to closing on Sunday.

Mon, 03/02/2015 - 22:03 | 5848033 NoPension
NoPension's picture

You think they'll make Quick mop the floors, Cramer dump the trash?

Mon, 03/02/2015 - 19:42 | 5847582 rsnoble
rsnoble's picture

So in other words, sub-3% unemployment rates are coming.

Mon, 03/02/2015 - 20:36 | 5847774 Sanity Bear
Sanity Bear's picture

do you really want to bet that a negative unemployment rate print is impossible in the New Normal?

Mon, 03/02/2015 - 20:16 | 5847709 Chuck Knoblauch
Chuck Knoblauch's picture

But we're going to double the number of part time jobs!

Turn that frown upside down.

LOLOL>>>>>>>>>>>>>>>>

Remember George, every time a bell rings an angel gets his wings.

:)

Mon, 03/02/2015 - 21:36 | 5847949 mastersnark
mastersnark's picture

That's a helluva alot of waiters and bartenders...so this is good for Brinker et al?

Mon, 03/02/2015 - 22:08 | 5848043 NoPension
NoPension's picture

Hey boys and girls, I had some beautiful storefront installed today. Couldn't understand a fuckin word they where saying. ElSavadoran or Guatamalan, doing jobs Mericans won't do.
We're so fucked.

Edit. On second thought, our kids all go to college now. Hi techy techs. No dirty hands.
We're so fucked.

Tue, 03/03/2015 - 07:54 | 5848943 JenkinsLane
JenkinsLane's picture

Should be good for $VIX in the single digits.

Tue, 03/03/2015 - 10:10 | 5849301 Midnight Hour
Midnight Hour's picture

I have to laugh every time I hear that talk of the interest rate will be going up.  More likely it will be going down. Europe is showing the way to go. Soon you will hear the Fed talking the Dollar down as it causes far to much damage to the economy.  Will the Fed ever come out and state that the economy is not in a recovery mode but is going backwards?

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