“Thank goodness equities went up in 2013, otherwise it might have been a rather depressing year” – Societe Generale’s Global Quantitative Research team.
The flamboyant disconnect between the uninspiring corporate realities, dolled up as they are, and the stock market that has been hopping relentlessly from one new high to the next befuddled a lot of smart people, forced any remaining bears to repent and convert, and sent analysts scrambling for answers.
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Some came up with newfangled metrics, fancy rationalizations, or near-religious leaps of faith to explain the phenomena. Others came up empty-handed or with even more befuddlement. But one conclusion that by now everyone has arrived at is that stocks simply go up.
Revenues and earnings, which should drive the stock market, have been mired in a pandemic of stagnation – particularly net income, rather than the doctored earnings per share. Our Exhibit A today is a high-growth tech company in promising sectors like Big Data and the “Cloud,” sectors the mere mention of which causes grown analysts to drool uncontrollably out of both sides of their mouths.
The company practically personifies the eloquent and cynical laments of Societe Generale’s Global Quantitative Research team – but more on that in a moment.
When Intel reported its earnings, CEO Brian Krzanich talked about “a solid finish to a year of transition.” There was revenue growth in the hot Big Data areas. Data center products were up 7%, cloud products up 35%, storage up 24%, high performance computing up 18%, networking up 31%, etc. “Enterprise, however, fell short of our expectations,” Krzanich confessed. They’d “overestimated the rate of recovery among corporate buyers.” And the PC business was “stabilizing” – corporate speak: it had its worst year in history [my take on this debacle…. But Wait … The PC Industry Hopes That It Hasn’t Lost Hope Yet].
So overall, annual revenue of $52.7 billion was down 1% from 2012, and down 2.4% from 2011. Net income of $9.6 billion was down 13% from 2012 and down 25% from 2011. Looking forward, revenues, profits, and capital expenditures would all remain flat – at least until the next update, at which time expectations might be lowered. Unperturbed, the stock is up 24% since the beginning of 2013, even after today’s 3.5% hit.
This kind of scenario has been playing out with company after company. And those are the lucky ones that have earnings. Outfits like Twitter that spill red ink are in a different ballpark altogether. But stocks just go up.
Which caused the apparently exasperated Global Quantitative Research team of Societe Generale to release a report that in its desperately eloquent manner hit the nail on the head (excerpts from the summary). They confirm that Intel’s revenue and earnings debacle is a pandemic:
“Earnings growth slowed to almost zero in 2013”
First is the notion that profits growth accelerated in the US last year. Yes, the pro-forma figures from popular providers such as I/B/E/S show EPS growth of around 6-7%, but pro-forma figures are whatever you wish them to be. Reported earnings growth slowed to almost zero in 2013 and EBIT is largely where it stood at the beginning of 2012.
“The great hope for 2014 slowed throughout 2013”
Capital expenditure growth, the great hope for 2014, slowed throughout 2013 as did cash-flow growth and sales growth. However, capex as a proportion of sales is at elevated (not depressed) levels. Why would a company step up investment when faced with contracting margins and lackluster demand?
Corporate cash is now borrowed money
US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers.
Deleveraging only on paper
Corporations are now “carrying more (not less) net debt than in 2009,” the quant team points out. But “deleveraging” – if you can call it that – has in fact been taking place, but in another way: on paper. The Fed’s QE has inflated asset prices and created some of the most beautiful bubbles mankind has ever seen. A lot of these assets at bubble valuations are now parked on corporate balance sheets – “no doubt an aim of central bank policy,” the team adds laconically. “This is the painless form of deleveraging. It is also the most temporary, for a simple pull-back in equities and rise in volatility will put the problem back on center stage.”
As we go into the thick of earnings season, the quant team laments that 2013 was “a year of weakening cash flow growth, lower profit growth, deteriorating earnings quality, and corporates piling on the debt – again!”
And the conundrum? “Thank goodness equities went up in 2013, otherwise it might have been a rather depressing year.”
But there have been some industries in the US that have actually done well. Auto sales have been hopping for the last few years, and production has soared, and exuberance along with it, and there were even hopes that sales would soon be where they’d been before the crisis, before the bankruptcies, the plant closures, the job destruction, the bailouts. Read…. The Next Tire To Drop On The US Economy