Nostalgia’s Not What It Used to Be
Nic Colas' monthly review of the Street’s revenue expectations for the companies of the Dow Jones Industrial Average finds that while markets may be in rally mode, analysts are still fretful about near term sales momentum at these large multinationals. Currently, they expect the average Dow company to post only a 3.6% sales “Comp” in Q1 2012 versus last year, or 5.0% for the non-financial companies in the index. That is the lowest expected growth rate for the current quarter since we started keeping tabs on what the analysts had in their models a year ago. Second quarter revenue expectations are also down to their lowest levels, at a 5.3% growth rate on average for the index, and 3.4% ex-financials. Street analysts are making up the difference for 2012 by boosting back-half expectations to 4-7% from the 2-6% they were carrying in their models just a few months ago. Glass half full says, “Easy comps into Q1. Buy em.” Glass half empty says “How do we get excited about 3-5% comps?” No glass says “Only 31 trading days until “Sell in May and go away.”
Today on a flight from Florida to New York, I caught a glimpse of the future and I am worried. Well, not the future – more like my future, or at least one potential version of it. A midweek, daytime, Gotham-bound JetBlue journey means one thing – retirees. That word used to mean something. Old people sitting on rockers watching the foot traffic in Boca. Ladies knitting scarves for their teenaged grandchildren to never wear. Bridge and Mahjong and super-strong Old Fashioneds at the VFW Hall on a Tuesday night. A quiet, dignified, insular experience centered on early bird discounts at buffet restaurants.
But the scales fell from eyes today as attractively demure lady of around 70 blatantly chatted up the 50-something man who was helping her hoist her wheelie bag into the overhead compartment. And the soon-to-be retired fireman in the row behind me with the all-too-fresh (and HUGE) tribal tattoo on his arm. And the ancient gentleman caressing the shoulder of a flight attendant and blocking the aisle during boarding. Older people are now just younger people with wrinkles and TSA-approved 1 liter plastic bags that rattle with prescription meds. It was like Spring break in reverse, both in direction and generation.
I got hit with a double dose of delusional nostalgia when I returned to the office and looked through our latest data on what Wall Street analysts have in their financial models for the companies of the Dow Jones Industrial Average. This is an exercise we’ve been doing for about two years now, with an eye to assessing how much enthusiasm the Street has for the global economy generally and multinational company sales momentum specifically. And my personal sense of déjà-vu comes from a decade of doing these models myself as a senior sell side analyst covering the auto industry.
There are three commandments that every sell side analyst follows when building their financial models - and as far as I can tell they still hew to these time honored guidelines. Unlike the geriatric partiers on my flight home, by the way.
- Keep the message consistent. If you have a “Buy” on a stock, you can’t be below consensus on sales or earnings expectations. That means monitoring the average estimates of your peers through the quarter and adjusting your models accordingly. Or changing your rating, but that is a painful exercise.
- Don’t set expectations too high. The second worst call a sell side analyst can get is from a company they follow that goes something like, “What are you thinking about with your current quarter sales and earnings estimates? All the guys that really know our story are way below you.” This is the Wall Street analyst version of a call from the police that your spouse is being held on ‘Intent-to-distribute quantity” drug possession charges. Surprising and unwelcome in equal and drastic proportions. So you keep your published expectations as modest as possible and perform occasion “Upside surprise” analyses if you want to show you are more bullish than other folks following the stock. The worst call, of course, is to bring your Blackberry and building ID down to HR.
- No matter what your detailed revenue models say, don’t forget Rules 1 & 2. Most good analysts have excellent revenue models that pick every bit of publically available information off the bones of regulatory filings and add whatever proprietary insights they can muster. But at the end of the day, you don’t want that “Take your numbers down” call from the company or the embarrassment of missing the actual results by a wide margin. So you stay safe.
Our monthly review of revenue estimates for the Dow companies shows that analysts are unambiguously cautious, if not outright frightened, by what they expect to see from first quarter earnings releases. A few numbers to support this assessment:
- The analysts that cover the 30 companies of the Dow currently expect the average revenue growth for these businesses to average 3.6% growth year over year for Q1 2012. For the non-financial names, this number is 5.0%. Both are the lowest printed expectations for Q1 2012 in the year we’ve been keeping track of analyst estimates for this quarter.
- The trend follows through for Q2 2012, with a 5.3% expected growth rate overall and a 3.4% year over year comp for the non-financials. That second print is actually just a hair better than a few months ago, but the overall trend is solidly lower for the nine months we’ve been keeping score.
- Analysts aren’t lowering the boom on 2012 as a whole – they are shifting their expectations to the third and fourth quarters. On average, they now expect 4-5% growth for Q3 2012 and 6-7% for Q4 2012.
The logical question given the current rally is “What’s going on here?” Most sell side analysts presumably have some access to a stock quote service or the occasional business periodical, so they know equities are in full-on rally mode. You’d expect them to start raising expectations, feeding off the signal that markets are growing more optimistic about the U.S economy and global prospects generally. We suspect they are staying on the sidelines for two reasons:
- They are hearing horror stories about various companies’ European operations in Q1. Fair enough on that point – there isn’t much positive corporate chatter on that front. Even my sporadic monitoring of the auto industry gives me a whiff of the truly dreadful cadence of business in many cyclical sectors for this region.
- They don’t have to bump numbers to pound the table on their favorite names. The current rally has been more about valuation than revenue and earnings momentum – our revenue expectation data is all the proof you need on that score. So why raise numbers if your “Buy” rated names are rallying without the need to put yourself on that limb?
All of this sets up market psychology on a razor’s edge for Q1 earnings reports. On the plus side – and that’s all that the market sees at the moment – expectations are so low that perhaps companies can beat them. On the cautionary side, can the market really keep its joie de vivre if all we get is a measly 3-5% top line expansion when companies report in April? And what about ‘Sell in May and go away? Only 31 trading days left until May 1st.