According to a February 12th report from Goldman Sachs Portfolio Strategy Research, management at S&P 500 firms have been consistently focusing on four key themes in their fourth quarter 2014 earnings conference calls.
GS analysts Amanda Schneider and colleagues elaborate on their thesis in the introduction to their report. “(1) Companies with significant international sales experienced the negative force of a rapidly strengthening US dollar on their top- and bottom-line results; (2) The benefit from lower oil prices on the US economy and consumer spending was almost unanimous; (3) Capex guidance varied significantly depending on the commodity price sensitivity of a company’s business; (4) Firms expressed high levels of confidence in the pace and durability of the US economic expansion but uncertainty regarding economic growth in Europe and Asia.”
Four key themes from fourth quarter 2014 S&P 500 earnings calls
Theme 1: The strong US dollar
Many firms in the S&P 500 with a high percentage of international sales saw negative currency impacts on revenue and EPS in 4Q 2014. Despite a good bit of hedging, management is consistently projecting this trend will continue in 2015. Of note, firms that also have significant costs in non-US locations saw some offset to lower revenues.
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Example firms: Citigroup, Caterpillar, Du Pont, General Electric, Google, International Business Machines, Johnson & Johnson, McDonald’s, Procter & Gamble, Phillips 66, United Technologies, and Exxon Mobil.
Theme 2: Lower oil prices improves business outlook
Management outside of the energy sector almost all commented that lower oil prices were an overall positive for U.S. economic growth and consumer spending. A number of companies that use a lot of oil also saw increased earnings. Not surprisingly, the vast majority of energy companies have suffered moderate to severe negative effects on their businesses due to the halving of oil prices over the last eight months.
Selected firms: Alcoa, Boeing, Bank of America, Caterpillar, Colgate-Palmolive, Delta Air Lines, Ford, Kinder Morgan, Phillips 66, Visa, and Wells Fargo.
Theme 3: Careful use of cash
Schneider and colleagues noted that the capital spending projections of S&P 500 firms to date were strongly correlated with the cash flow impact from lower oil prices and a stronger dollar. Nearly all energy companies slashed capital spending because of the decline in oil prices. Of note, this trend did not extend to other sectors and quite a few companies announced increased cash spending guidance.
Selected firms: Amgen, Anadarko Petroleum, Boeing, ConocoPhillips, Costco, Chevron, Delta Air Lines, Dow Chemical, Freeport-McMoRan, McDonald’s, Morgan Stanley, and Schlumberger.
Theme 4: Management confidence lies with the US
The large majority of management also noted in their earnings calls that they expect stable US economic growth for the next few quarters. The projections for the economies of Europe and Asia were much less certain.
The GS report notes that: “Our U.S. Economics team forecasts above-trend US GDP growth of 3% in 2015. Europe’s uncertainty arises from economic and geopolitical concerns in Greece and Russia. Asia witnessed patches of positive growth but remains in a recovery phase.”
Selected firms: Citigroup, Colgate-Palmolive, Du Pont, Facebook, Freeport-McMoRan, General Electric, Johnson & Johnson, 3M, Morgan Stanley, Phillips 66, and United Technologies.