The myopia displayed by corporate America in terms of inflating short-term earnings at the expense of balance sheet leverage and long-term growth is now so pervasive that it’s become a major campaign issue for Hillary Clinton who recently unveiled a plan to forcibly break what she’s calling the "tyranny of the next earnings report" (for more on possible ulterior motives for Clinton’s decision to effectively tax shortsightedness, see here).
Zero Hedge readers are well aware of how ZIRP has served as a convenient excuse for price insensitive corporate management teams to borrow and plow the proceeds into EPS-inflating, equity-linked compensation-boosting buybacks.
This comes at a price. Capex (i.e. future productivity) and wage growth suffer even as investors are rewarded and executives are enriched.
Of course buying back shares can obscure negative earnings trends but it can’t do anything to hide the fact that revenue growth is non existent and indeed, as FactSet reports, "the blended revenue decline for Q2 2015 is -4.0%. If this is the final revenue decline for the quarter, it will mark the first time the index has seen two consecutive quarters of year-over-year revenue declines since Q2 2009 and Q3 2009. It will also mark the largest year over-year decline in revenue since Q3 2009 (-11.5%)."
Here with more on what certainly looks like a 'revenue recession’ and on the excessive price investors are willing to pay for top-line growth, is Barclays.
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Paying for revenue growth
Growth is not easy to find.
In the U.S., the economy has failed to accelerate, with GDP growth stubbornly below 2.5%. It is worse in Europe and even China has slowed. Stagnant global economic growth, a strong USD, and lower oil prices have combined to cause revenue growth for the S&P 500 to fall. The first quarter of 2015 was the first quarter of negative sales growth for the S&P 500 since the financial crisis. 2Q15 is expected to be worse (Figure 2).
Few sectors have been immune to the slow growth macro environment. Only health care continues to experience sales growth of more than 5%. Over the last 15 years there have not been many others times when only one sector was able to achieve more than 5% sales growth (Figure 3).
Considering the scarcity of growth it is rational for investors to pay for it. But, has the outperformance of growth gone too far? Is it now too expensive and poised to underperform? We see evidence that it is.
In Figure 11 we show the median price-to-sales ratio for each quintile of the S&P 500 based on revenue growth. As shown, there is a substantial premium being charged for the fastest growing companies. This once again indicates that the price of growth is now high, in our opinion.