Sometimes I am clueless about what is driving stock prices. In September 2008 I did not sell a share even though my commute took me past the Lehman Brothers building on 7th Avenue, which was being both swarmed by rabid reporters and vacated by shell-shocked employees clutching cardboard boxes.
But lately I have had a better grip on the markets. In an upbeat post last January I said there could be a “valuation levitation” that would drive stock prices well above most year-end 2013 S&P 500 price targets on the Street, because strategists’ PE assumptions were way too conservative. (Why buy a 2% treasury bond, I asked, when you could buy a blue-chip equity with 2-3% current yield and 5-12% dividend growth?) A year-end 2013 price of 1864 was not crazy, I suggested. More recently I detected a “cacophony of complacency” and excessive bullishness, setting the stage for increased stock market volatility. Voila.
Where are stocks headed next?
Higher over the next 3-6 months, but with ample volatility as emerging markets cope with Fed tapering that exposes the economic and financial fragility of certain countries some of which are in political turmoil (i.e., Turkey, Ukraine, Thailand, Egypt, Argentina). Chinese growth is fine for now, but so was U.S. growth in 2006; the country needs substantial financial reforms to avoid a major credit crisis, and there is little evidence those reforms are under way. Meanwhile, back in the U.S., Obama continues to be a weak and divisive leader who fails to tackle big issues such as tax reform.
Q4 Profits Suggest Global Growth Is Improving Modestly
As stocks vaulted higher at the end of last year, commentators searching for an explanation opined that U.S. growth was strengthening and we would have “synchronized global growth” in 2014. But recent EM turbulence and some weak U.S. data call that into question.
To get a fresh perspective we examined the comments, on Q4 earnings calls, of twelve important, globally diversified companies with aggregate annual revenue of $504 billion. I don’t pay too much attention to the forecasts of CEOs and CFOs, but they do have a granular knowledge of current business conditions. Right now they say the global economy is indeed improving. They see decent growth in the U.S. and emerging markets (principally China) and palpable improvement in Europe. Southern Europe is stabilizing. Global growth is definitely stronger than it was in the first half of last year and seems consistent with the sell-side strategists’ estimate of $120 for S&P 500 EPS. With PE ratios elevated, this earnings growth is important to continued stock price appreciation.
My source is earnings call transcripts available on www.seekingalpha.com, which, by the way, is a very convenient way to access Street presentations. (Why does every company have to arrange its Investor Relations website differently, even though they all do exactly the same thing?).
GE—solid growth
“Orders grew by 8%….Growth market orders grew by 13% and the U.S. expanded by 8%, and Europe grew by 3%.” (Note to Jeff Immelt: Please come up with a better term than “growth market” to refer to emerging markets. After all, the U.S. and Europe are also growing.)
United Technologies – revenues accelerating
“Organic sales were up 4% in the fourth quarter after being flat through the first three quarters.” This is significant as UTX is widely diversified across aerospace, construction, and other markets.
Honeywell – strong growth
Sales “grew an impressive 8% on a reported basis, 5% on an organic basis. The strength we saw at year-end was broad-based.” Organic sales growth was 5% in the U.S., 4% in Europe and 13% in China.
3M—acceptable global growth, with gradual improvement in Europe
Local currency sales growth was 4.5% in the U.S. Organic sales growth in EMEA was 3.4%, including 3% in Europe, which continued “the positive trends we have seen in recent quarters.” Asia Pacific had 3.3% organic growth in the fourth quarter.
Thermo Fisher Scientific — solid growth globally
The company reported “ongoing strength in Asia Pacific and improving conditions in Western Europe.” The U.S. is improving somewhat. “North America revenue grew in the low-single digits. Europe grew just above the company average and Asia Pacific grew in the low teens, with China growing in the mid-teens. Rest of world grew in the mid-teens,”
Caterpillar – Asia Improving
Mining equipment is still very weak. But demand for construction equipment in China is improving. “Our sales in China were up more than 20% this year.” CAT expects 7.5% GDP growth in China in 2014.
DuPont—Decent Global Growth
Sales rose 6% globally—4% in North America, 8% in “developed Europe, Middle East and Africa and 9% in Developing Markets.” Unusual seasonal patterns in the ag business boosted revenues; on the other hand, currency was a modest negative (as at most multinationals).
Illinois Tool Works—modest improvement
“Q4 revenues were up 4.8% [y/y] in a modestly improving macro environment. Our Q4 organic growth of 3% was up from flat in Q3, driven largely by North America and China, with overall organic growth of 2% in Europe.” (Even modest growth in Europe is an improvement compared to the past year.)
Parker Hannifin – acceptable growth
The company generated 3.1% organic sales growth (which excludes acquisitions, currency and new joint ventures).
TE Connectivity –decent growth, led by vehicles
“The majority of the markets we serve continue to improve…..Orders increased 8% in the quarter.” The company raised guidance for the fiscal year. “Global auto demand continues to be strong running a little ahead of historical long-term vehicle growth rates…..Europe was up about 11% due to strong exports and slight improvements in local demand.”
Praxair—decent global demand for industrial gasses
The company, which has a big Brazilian operation, said “Organic sales increased 7% from higher volumes and higher overall pricing, with growth across all geographic segments.” Organic sales growth in Europe, excluding the effect of currency translation, was 7%. Southern Europe “appears to be stabilizing.” In Asia, sales grew 5% on volume growth of 8%.
SBUX – Good Global Performance, including Europe & Asia
Global same store sales growth was 5%. “Our important EMEA (Europe, Middle East, Africa) region with over 2,000 stores had the strongest growth in more than three years.” Starbucks America had 8% revenue growth and comp sales up 5%. Revenue in Asia rose 25%, with comp growth of 8%.
P&G—decent growth
The company, which has had a spotty growth record over the past few years, registered 8% growth in emerging markets. This largely reflects a “same country, same category, apples to apples growth rate.”
Collapsing EM currencies will Hit Q1 earnings of some companies
When a currency such as the Turkish lira makes a quick, steep decline, the value of a U.S. multinational’s revenue and profits in that country decline pretty sharply. So the recent collapse of EM currencies will hit the profits of some multinationals in Q1 and beyond. However, this is not too big a problem so long as China is reasonably healthy.
