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Welcome To The Revenue Recession
Via ConvergEx's Nick Colas,
The “Revenue Recession” is alive and well, at least when it comes to the 30 companies of the Dow Jones Industrial Average.
Every month we look at what brokerage analysts have in their financial models in terms of expected sales growth for the Dow constituents. This year hasn’t been pretty, with Q1 down an average of 0.8% from last year and Q2 to be down 3.5% (WMT and HD still need to report to finish out the quarter). The hits keep coming in Q3, down an expected 4.0% (1.4% less energy) and Q4 down 1.8% (flat less energy).
The good news is that if markets discount 2 quarters ahead, we should be through the rough patch because Q1 2015 analyst numbers call for 1.9% sales growth, with or without the energy names of the Dow. The bad news is that analysts tend to be too optimistic: back in Q3 last year they thought Q2 2015 would be +2%, and that didn’t work out too well.
Overall, the lack of revenue growth combined with full equity valuations (unless you think +17x is cheap) is all you need to know about the current market churn. And why it will likely continue.
The most successful guy I’ve ever worked for – and he has the billions to prove it – had the simplest mantra: “Don’t make things harder than they have to be”. In the spirit of that sentiment, consider a simple question: which Dow stocks have done the best and worst this year, and why? Here’s the answer:
The three best performing names are UnitedHealth (+19.3%), Visa (+18.2%) and Disney (14.2%).
The worst three names are Dupont (-28.3%), Chevron (-23.5%) and Wal-Mart (-16.0%).
Now, consider the old market aphorism that “Markets discount two quarters ahead” (remember, we’re keeping this simple). What are analysts expecting for revenue growth in Q3 and Q4 that might have encouraged investors to reprice these stocks higher in the first 7 months of the year?
For the three best performing stocks, analysts expect second half revenues to climb an average of 14.1% versus last year.
And for the worst three? How about -22.1%. Don’t make things harder than they have to be.
That, in a nutshell, is why we look at the expected revenue growth for the 30 companies of the Dow every month. Even though earnings and interest rates ultimately drive asset prices, revenues are the headwaters of the cash flow stream. They also have the benefit of being easier for an analyst to quality control than earnings. Not easy, mind you – just easier. Units, price and mix are the only three drivers of revenues you have to worry about. When those increase profitably the rest of the income statement – including the bottom line – tends to take care of itself.
By both performance and revenue growth measures, 2015 has been tough on the Dow. It is the only one of the three major U.S. “Indexes” to be down on the year, with a 2.3% decline versus +1.2% for the S&P 500 and +6.3% for the NASDAQ. Ten names out of the 30 are lower by 10% or more, or a full 33%. By comparison, we count 107 stocks in the S&P 500 that are lower by 10% or greater, or only 21% of that index.
Looking at the average revenue growth for the Dow names tells a large part of the story, for the last time the Average enjoyed positive top line momentum was Q3 2014 and the next time brokerage analysts expect actual growth isn’t until Q1 2016. The two largest problems are well understood: declining oil and other commodity prices along with an increase in the value of the dollar. For a brief period there was some hope that declining energy company revenues would migrate to other companies’ top lines as consumers spent their energy savings elsewhere. That, of course, didn’t quite work out.
Still, we are at the crosswords of what could be a turn back to positive growth in 2016. Here’s how Street analysts currently expect that to play out:
At the moment, Wall Street analysts that cover the companies of the Dow expect Q3 2015 to be the trough quarter for revenue growth for the year. On average, they expect the typical Dow name to print a 4.0% decline in revenues versus last year. Exclude financials, and the comp gets a little worse: 4.4%. Take out the 2 energy names, and the expected comp is still negative to the tune of 1.5%.
Things get a little better in Q4, presumably because we start to anniversary the declines in oil prices as well as the strength of the dollar. These both began to kick in during Q4 2014, and as the old Wall Street adage goes “Don’t sweat a bad quarter – it just makes next year’s comp that much easier”. That’s why analysts are looking for an average of -1.8% revenue comps for Q4, and essentially flat (-0.01%) when you take out the Dow’s energy names.
Go all the way out to Q1 2016, and analysts expect revenue growth to finally turn positive: 1.9% versus Q1 2015, whether you’re talking about the whole Average or excluding the energy names. Better still, analysts are showing expected revenue growth for all of 2016 at 4.1%. OK, that’s probably overly optimistic unless the dollar weakens next year. But after 2015, even 1-3% growth would be welcome.
We’re still keeping it simple, so let’s wrap up. What ails the Dow names also hamstrings the U.S. equity market as whole. We need better revenue growth than the negative comps we’ve talked about here or the flattish top line progressions of the S&P 500 to get stocks moving again. The third quarter seems unlikely to provide much relief. On a more optimistic note, our chances improve in Q4 and even more so in Q1 2015. Until we see the U.S. economy accelerate and/or the dollar weaken and/or oil prices stabilize, the chance that investors will pay even higher multiples for stagnant earnings appears remote. That’s a recipe for more volatility – potentially a lot more.
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The markets are broke and the Dow now does the opposite of what it was created for. All the big players think they have found the perfect cheat on the system, but in the end, the casino always wins.....
Revenue growth in an environment of stagnant/declining wages? Dream on.
Revenues from government spending shouldn't even be counted as revenues.
This money belongs to taxpayers and I didn't sign the check!
I'm speechless.
greem shoots....jobless recovery.....revenueless recovery
were recovering
oh look a bridge for sale
Everything is awesome!
Would they lie?
U.S. Containerized Exports Fall Off the Chart—-Down 29% Y/Y“Many of our major trading partners are experiencing stalled or slowing economies, and the strength of the US Dollar versus other currencies is making US goods more expensive in the export market.” That’s how the Cass/INTTRA Ocean Freight Index report explained the phenomenon.
What happened is this: The volume of US exports shipped by container carrier in July plunged 5.8% from an already dismal level in June, and by 29% from July a year ago. The index is barely above fiasco-month March, which had been the lowest in the history of the index going back to the Financial Crisis.
http://davidstockmanscontracorner.com/u-s-containerized-exports-fall-off...
wrr
What, no doom?
Visa is the Federal Reserve!
The Federal Reserve is Visa!
What we have going on is the death or real business. You just can't make money producing anything real. Does anyone really truly believe Facebook makes money? Or any other .com bullshit company for that matter. Not a single one could stand up to an honest audit.
Real commerce has been dying since 1989, replaced by the channel stuffed mirage of Wall Street backed square footage expansion. Like the Fed printing money, it is only the flow of product that mattered. As long as product keeps flowing, revenue and therefore earnings can be faked. Pre-booked profit, new store chargebacks, and inter-corporate inventory shift can make it appear a corporation is selling billions of dollars worth of goods when in reality almost nothing leaves through the front doors.
I've done the math and the sellthrough is impossible. A store in a mall can not move $35k a day at every single location across the country. It isn't going to happen, yet somehow the stated revenue for the parent corporation makes that claim. If all that product really isn't moving then it means the real dollars circulating through the economy are magnitudes less than the claim of GDP. I would wager the real value of actual sold goods is less than $5 trillion per year. Cutting out automobiles and food and you are looking at a lot less.
You have trillions upon trillions of dollars of equity value chasing a tiny slice of pie. Reality is nearly every company is bankrupt on the real ledger.
An example is one company I work for through a licensee. They want to grow a division to $100 million dollars from $25 million. However they refuse to sell product below $35. 65% of the business is done below $30 retail. The company claims they are #1 in the category because they have the #1 product in the high dollar price bracket. In reality they only sell 5% of the total volume across the product category. The total category represents $205 million dollars. The company wants to represent 60% and dominate a category, yet they refuse to operate in the volume price points. It is impossible to grow the business four fold when you only operate in a segment that represents 35% of total sales. Nor do they want to sell to the retailers that represent the volume business.
This is the thinking that permeates every executive's brain at the sociopathic publicly traded behemoths.
I have sat in meetings from every division and added up the sales. I've got close to $1.2 billion now, but the company claims they sell $10 billion in revenue. Unless there is some ghost division I am unaware of I can't seem to find another $9 billion anywhere in the building.
If you have 300,000 people playing a sport and each person spends an average of $200 a year on equipment, you have a total market of $60 million. It is impossible for the market to be $250 million or $1 billion. However because you have 20 different companies and a dozen different retailers chasing that $60 million, you might have $250 million in inventory vying for that $60 million piece of pie. At the end of the year $190 million in inventory sits wasted. A rather insane misappropriation of materials. However, if this overproduced inventory can somehow be counted as sold, you can make the category and therefore you revenue appear larger than any true estimate of the business. The miracle of channel stuffing.
Because the value of channel stuffed merchandise is actually magnitudes greater than true sales to consumers, the real business is not to build product for consumers but to build product that can be channel stuffed at your publicly traded retailer of choice. A company designing and trying to sell product for actual consumers is hopelessly outmatched and can never get placement at a retailer because they know the actual market is $60 million and may only be hoping to sell 5% of the market for a paltry $3 million. A mega retailer needing $50 billion worth of merchandise to fill it's many doors isn't going to bother ordering from a company that can only produce $3 million. Without an avenue to sell their product, the small company withers and dies.
There you have it, the death of real business.
See - all is awesome. Beyond 2 more quarters (and who gives a rats ass about another 2 bad quarters) it is SMOOTH sailing! So keep buying while stawks are CHEAP - I mean they WILL be at 20 x by early 2016 cause the fundamentals will grow into that muliple. As a sell sider said the other day on CNBC, we are just in a "time correction". No shit.
Why no Negative values for rating an article?