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15 November 2012

Corporate Revenue Expectations for Q4 - Hanging By A Thread

Wall Street is still hoping for a positive outcome with respect to fourth quarter 2012 top line growth. But revenue comparisons are still on the decline.

Our monthly review of analysts’ revenue expectations for the companies of the Dow Jones Industrial Average finds that Wall Street is still hoping for a positive outcome with respect to fourth quarter 2012 top line growth.  On average, the analysts who cover these names expect revenue comps to run +1.9% versus Q4 2011.  That’s a reversal from the negative comp of (2.0%) we saw in Q3 2012 versus the prior year.  The trend in these projections is, however, still on the decline.  That +1.9% comp used to +6% back in April 2012.  Looking further out, analysts expect revenue growth to accelerate to 2.5-3.4% (all 30 companies and ex-financials) in Q1 2013 and 3.8% for Q2 2013.  Given how poorly markets responded to news of weak top line growth in Q3 2012, this is shaping up to be the critical “Micro” issue for U.S. equities once we get past the fiscal cliff.

The common American phrase related to failed multitasking – “He/she can’t walk and chew gum at the same time” – apparently has some rich history.  It came into common usage in the 1970s as a quote from former President Lyndon Johnson, as a reference to President Gerald Ford when entered the Oval Office upon Richard Nixon’s resignation.  It wasn’t about Ford’s supposed clumsiness; it was about his intellectual capabilities.  And the original phrase, whose origins seem to be in Johnson’s home state of Texas, didn’t start with “Walk.”  I will leave it there.

I thought of that phrase as I reviewed what Wall Street expected for revenue growth from the 30 companies of the Dow Jones Industrial Average.  That’s not meant to be unkind.  But consider the following details (also included in the attachments after this note):

·         Last quarter was the first negative revenue comp (based on year-over-year growth) for the companies of the Dow since Q3 2009.  Revenues declined by 2% versus the prior year.  Even though the sell side analysts who cover these companies had been reducing estimates every month since March 2012, they still overestimated the amount of revenue growth these companies could muster in a worsening global economy. 

·         For the fourth quarter of 2012, analysts expect revenues to rebound to a +1.9% comparison versus last year’s Q4.  They have been bringing down these expectations on a monthly basis (just as they had for Q3), but they remain positive.  The largest reason this comp remains positive is that analysts expect five companies – Chevron, United Technologies, JP Morgan, Boeing, and Home Depot – to all post double digit top line growth.  That’s enough of a cross section of industries and geographic focus that no simply explanation falls to hand. 

·         For the first and second quarters of 2013, analysts expect further improvements in sales growth for these 30 companies.  In Q1 2013, the expected top line growth rate is 2.5% in total and 3.4% without the financial names.  In Q2 2013, this expands further to an expected 3.8% comp (3.7% without financials).

Remember that we are talking about the Dow Jones Industrial Average here – these are large companies with global footprints.  Their business models don’t turn on a dime, and their revenue footprint makes them, collectively, a reasonable proxy for the global economy.  We checked through the corporate actions of the companies involved, and while there are a few largish acquisitions in the mix they are not enough to explain the positive expected comparisons.

What the data shows is, kindly put, an anomaly.  Typically, sell side analysts review their financial models after every quarterly financial report.  If a given company missed expectations, the analyst will shave an incremental amount out of top line growth out of their future projections.  That hasn’t happened here.  The third quarter of 2012 represented a pretty clean miss in terms of revenue projections for the Dow companies.  And yet the Q4 expectations show a resumption of positive growth, rather than the outright contraction of Q3 2012.

Now, perhaps macro trumps micro for the next few weeks and markets themselves will be unable to walk (focus on the Fiscal Cliff) and chew gum (examine company fundamentals) at the same time.  Revenue expectations for the U.S. equity markets still appear too high, so perhaps the analysts who publish them have a few weeks before the market turns their attention to Q4 2012 results.  That would be a “Good” scenario for U.S. stocks – a resolution to the Cliff, and reasonable expectations for financial results.  Let’s hope everyone in Washington and Wall Street sharpens their pencils, and soon.

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