Four Themes/Excuses Dominate Earnings Calls: Beige Book

Four Themes/Excuses Dominate Earnings Calls: Beige Book

The vast majority of earnings reports from S&P 500 companies are in the books, and management from the companies generally focused on two positive factors and two negative factors. Unsurprisingly, companies blamed the strengthening of the U.S. dollar was a major negative issues for most of the companies. Severe winter weather also impacted companies affected heavily by consumer spending. In spite of the problems during the quarter, this year brought the biggest earnings beat in three years for the S&P 500.


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Q1 Beige Book is out

Tumbling oil prices have been seen as a major positive, but apparently most companies are not yet seeing those benefits. Additionally, the outlook in Europe is starting to shift toward the positive, although companies remain cautious on the region’s recovery.

Goldman Sachs analyst David Kostin and his team released the latest edition of their S&P 500 Beige Book this week. They focus on comments made by the management of 61 companies in the S&P 500 on their earnings calls. The 61 companies make up 29% of the index’s total revenues and 36% of its equity capitalization.

USD weighs on S&P 500 earnings

As has been expected, the strengthening of the U.S. dollar against foreign currencies has really done a number on companies with international exposure. It’s expected that currency headwinds will continue throughout this year. Companies that see some of their costs in local currencies in foreign countries were hedged a bit against these headwinds as they were partially able to offset them by seeing lower international production costs.

The Goldman Sachs team included commentary from the managements of several companies that mentioned how the stronger dollar negatively impacted their first quarter earnings. McDonald’s listed the impact as $700 million or 9 cents per share, while Facebook estimated the negative impact at about 7 percentage points or about $190 million against its revenue growth. The social network warned that currency headwinds will likely be worse in the second quarter.

Caterpillar noted that some of its overseas production and costs in foreign currencies helped reduce the impact of the stronger dollar by $419 million, although sales were $342 million lower as a result of the currency headwind.

Waiting on benefit from oil prices

Falling oil prices have negatively impacted sales of energy companies, but they have yet to have a measurable positive impact on other companies. Goldman noted that oil prices are still more than 40% below the highs reached in the middle of last year. The firm estimates about a “tax cut” of about $150 billion to consumers, although consumers are apparently not yet increasing their spending.

Retailers generally didn’t have great sales during the first quarter, although that was at least partially blamed on severe winter weather (see next point). Discover management noted that consumer discretionary spending did not pick up during the quarter even though they thought it would.

Simon Property also noted that consumers remain cautious and that behavior has been difficult to predict because while confidence is improving slightly, consumers are still reducing their debt.

Severe weather weighs on sales for some

Goldman Sachs also found that severe weather had little to negative impacts on several companies. Simon Property reported a negative impact that was worse this year than last year because of its great exposure to the Northeast.

General Electric also noted impacts on its appliance sales. Philips 66 reported a weeks-long negative impact, which the company said is unusual because sales “typically come roaring back” after large snowstorms, thus offsetting the lower sales during the time after the storm. This year, however, this didn’t happen. FedEx reported little impact from severe weather, particularly compared to last year.

Is Europe stabilizing?

And finally, there are signs that the Eurozone is beginning to recover. The European central bank’s stimulus programs, borrowing costs that are at a record low and increasing asset prices helped boost companies’ confidence in the region’s recovery. They are still cautious, however.

Coca-Cola management said Europe’s recovery is in “its early days” but that deflation is a concern. They also called consumer spending in the region “sluggish,” adding that it will take time for the stimulus programs to trickle down to consumers and result in greater discretionary spending.

Caterpillar management noted growth in Germany especially, although they said they weren’t seeing it in their sales. They do believe the Eurozone is “in the early stages of what will be a recovery” but that they “don’t think it’s going to be a boom.” Further, they expect “anemic growth” there for now.

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