Profitability Issues

Prices Paid And Prices Received Diffusion Indices

Each month the Philadelphia Fed releases the Business Outlook Survey, which contains a variety of information concerning business conditions.

As seen on the site:

The Business Outlook Survey is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received. The survey has been conducted each month since May 1968.

One component of this survey are diffusion indices for both “Prices Paid” and “Prices Received.” (for those unaware, this survey provides the following definition: ”Diffusion indexes represent the percentage indicating an increase minus the percentage indicating a decrease.”)

Doug Short provides a monthly blog post concerning the Philadelphia Fed’s Business Outlook Survey. For reference purposes, here is a chart he has created that shows, from a long-term perspective, the “Prices Paid” and “Prices Received” diffusion indices (shown by the dots) and their 12-month moving averages (shown by the solid lines) from the October 2013 report :

(click on chart to enlarge image)

_____

StratX, LLC offers the above data and projections for informational purposes only, and does not necessarily agree with information provided by these outside parties.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Businesses’ Forecast Of Long-Term Inflation And Year-Ahead Unit Sales Growth

The Atlanta Federal Reserve publishes a monthly report titled “Business Inflation Expectations” (BIE) that contains statistics from a survey of regional businesses’ views on various factors that impact profitability. These factors include unit costs, unit cost expectations, sales levels, profit margins, and other factors.

As described on the site:

Approximately 300 panelists receive the survey each month. Panelists represent businesses of various sizes headquartered within the Sixth District, which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee. Panelists range from executives of large corporations to owner-operators of small businesses. The industry composition of the panel roughly reflects the makeup of the national economy. Nevertheless, survey responses are weighted by industry shares of national gross domestic product.

An excerpt from the October 2013 BIE Survey (pdf) dated October 16, 2013 (involving 216 firms responding) :

Respondents indicated that, on average, they expect unit costs to rise 1.9 percent over the next 12 months, roughly in line with the recent year-ahead inflation forecasts of private economists. Inflation uncertainty was unchanged at 2.4 percent in October. Firms also report that, compared to this time last year, their unit costs are up 1.7 percent. Sales levels declined in October, with roughly 46 percent of respondents saying their current sales levels are at or above normal compared to 52 percent in September. Profit margins also declined, with only 41 percent of respondents indicating their profit margins are at or above normal, compared to 49 percent in September.

This month’s “quarterly question” concerned annual inflation expectations over the next five to ten years. As seen in the report:

Over the long term, that is, per year over the next five to 10 years, respondents expect unit costs to increase 2.7 percent, on average, virtually unchanged from the July reading of 2.8 percent, but the lowest measure to date. Respondents’ uncertainty regarding this expectation was 2.4 percent.

Furthermore, the “special question” asked respondents about their expectations for year-ahead unit sales growth. The average growth was 1.9%.

The report also includes a variety of charts depicting respondents’ answers.

_____

StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.

—–

The Increasingly Competitive Chicago-Area Grocery Segment

The June 6 blog post (“Profitability And Competition In The Grocery Business“) discusses a variety of issues concerning increasing competition and margins in the grocery business.

In response to Safeway’s recent announcement concerning Dominick’s, the October 11 Chicago Tribune article titled “Dominick’s parent pulling out of Chicago market” offers commentary and statistics regarding the increasingly competitive Chicago-area grocery segment.

Three notable excerpts from the article:

Dominick’s did neither discounts nor delicacies better than its competitors, and even on convenience it had its match in Jewel, which has 178 Illinois locations, mostly in the northern part of the state. Under such brutal pressure, Dominick’s has been losing market share in the Chicago area for some time.

also:

In the Chicago area, according to a source with knowledge of the business, Jewel, which also was sold this year, has a 29.1 percent market share; Wal-Mart, 9.4 percent; Dominick’s, 8.7 percent; and Costco, 7.3 percent. As recently as the late 1990s, Jewel and Dominick’s controlled two-thirds of the market, the source said.

also:

Safeway President and CEO Robert Edwards laid out the problem with Dominick’s in a conference call with Wall Street analysts Thursday evening. He said the Chicago market is “fragmented” and noted the increased competition from new companies. Safeway said the Chicago stores are the lowest performing in the company.

_____

StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

The Future Direction Of Corporate Profitability

John Hussman, in his September 23 Weekly Market Comment, states the following:

Again, the difficulty with valuing stocks on the basis of raw price/earnings ratios is that corporate profits as a share of GDP are presently over 70% above their long-term historical norm. Though the actual course of corporate profits will be affected by numerous factors, including the extent to which extraordinary fiscal deficits normalize, we would expect corporate profits over the coming 3-4 year period to contract at a rate of somewhere between 5-15% annually. The practice of valuing stocks on the basis of current earnings or Wall Street’s projections of “forward operating earnings” (which embed assumptions of even more extreme profit margins) has never in history been more reckless and misleading.

Following these comments is this chart:

–

My comments:

The sustainability of today’s levels of corporate and business profitability is currently a key issue, especially given various profitability metrics – including the S&P500′s operating margins, net profit margins, operating profits, EPS, as well as after-tax corporate profits as a percentage of GDP and aggregate after-tax corporate profits – are not only at or near record-high levels, but also in most cases far above historically “normal” levels.

While the vast majority of forecasts from both investment analysts as well as corporate executives indicate continued growth in profitability, my analyses indicate that corporate profits will fall substantially from these levels, with far-reaching implications for many parties.

While I find many of Hussman’s writings to be interesting – and I generally agree (albeit for some reasons that differ) with many of John Hussman’s statements regarding the vulnerability of corporate earnings to decline – one aspect of his statement highlighted above I do not agree with. That has to do with the pace and duration of the projected future earnings decline.

While he says “…we would expect corporate profits over the coming 3-4 year period to contract at a rate of somewhere between 5-15% annually,” my analyses indicate that the earnings decline will be steeper and faster than the 5-15% annual rate which he states. There are many reasons for my belief in the steepness of such an earnings decline; some of which I discussed in the post of July 25, 2013 titled “Headwinds Facing Future Corporate Earnings.”

I also believe that the coming economic environment will not only see a rapid decline in earnings, but also an environment in which there is no (aggregate) profitability – i.e. substantial aggregate losses will occur as well as deep declines in aggregate revenues. Such an environment will happen after the “…substantial ‘upheaval’ via a future ‘crash‘” that I recently mentioned in the September 18, 2013 post titled “Has The Financial System Strengthened Since The Financial Crisis?” as well as the October 8 post titled “Building Financial Danger – October 8, 2013 Update.”

—–

Notable Statistics Regarding Q3 2013 S&P500 Earnings

The September 30, 2013 FactSet Guidance report (pdf) contained a variety of notable statistics with regard to S&P500 earnings guidance.

Here is one excerpt, from page 2, that is particularly notable:

Record High Number (89) and Percentage (82%) of Cos. Issuing Negative EPS Guidance for Q3
For Q3 2013, 89 companies have issued negative EPS guidance while 19 companies have issued positive EPS guidance. If 89 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 88, which was recorded in Q2 2013. If 19 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing positive EPS guidance for a quarter. The current record is 22, which was also recorded in Q2 2013.

_____

StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.

—–