Over the past few months, my sales growth indicator has moved up to around 4% yr/yr
from 3%. The very long term average for yr/yr sales growth is about 6.5% and the current
measure is running lower both in terms of volume growth and pricing. My expectation for
the current year, set at the outset of 2013, was for a 6% yr/yr gain through Dec. So far,
both volume and pricing have fallen below the estimate. Historically, it has been hard
to maintain profit margins when 12 month growth comes in below the 5% level. On the
plus side, the leading indicator sets I follow suggest at least a mild acceleration of volume
The work continues to suggest mild pressure on the operating profit margin through Aug.
Facilities operating rates have been down ever so slightly over much of 2013 and this has
worked as a modest drag on profit margins. My sales vs. cost ratio has been running about
-0.4% which means that pricing has not been recouping operating cost. My productivity
measure has been flat this year, too. Productivity growth has naturally slowed appreciably
over the past two years following the dramatic improvement seen over 2009 - 10. If sales
do pick up in the final quarter of the year as now suggested, companies can recover some
of the modest pressure on margins seen so far in 2013.
S&P 500 Net Per Share
I have been hoping that SP500 eps would rise 6.5% to about $103 per share this year. Net
per share could actually do a little better owing to factors such as lower cost of capital and
share buybacks, but $103 of pure operating profits would be fine given drags on sales
growth and operating margins seen over most of 2013.
The stock market often heads for trouble when SP 500 net per share rises above the top of
the very long term range of trend earnings such as happened in 2000 and 2007. The top of
the long range trend channel is now running about $120. The economic recovery is now
over four years in duration, but profits are running well below the top of the long term
range owing to how deeply depressed eps was at the bottom of the recession and the fact
sales growth has moderated markedly since mid - 2012.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!