With Q4 earnings season drawing to a close, here is a quick recap of the key issues facing corporate CEOs and CFOs based on their conference calls as summarized by Goldman's David Kostin: 1) Company managements forecast positive US GDP growth in 2016, in contrast with investor concerns of a potential recession. However, global growth prospects appear grim, particularly within commodity-exposed nations. (2) Strong domestic consumer demand persists amid industrial weakness. (3) Several firms announced large or accelerated share repurchase programs in 2016. Corporates will remain the largest source of US equity demand this year. (4) Despite recent economic and currency turmoil, firms view China as an attractive market in the long term.
Oddly enough, despite consensus being on the verge of forecasting that 2016 will see another Y/Y EPS decline, which would mean 7 consecutive quarters of declining earnings growth, management teams still remain oddly upbeat and instead of conserving cash, they prefer to delude themselves that the current economic slowdown will be transitory and chose to spend said cash on stock buybacks instead, giving shareholders one last out as the company itself scrambles to buy every share outside shareholders (and management teams) have to sell. Good luck with that.
Here are the 4 key themes summarized:
- Theme 1: US economy appears insulated from global weakness - Managements expect stable US economic growth in 2016, dismissing concerns of a potential recession. However, global growth forecasts remain bleak.
- Theme 2: Strong domestic consumer demand persists - Companies benefit from positive US consumer spending. Wage and job growth, low rates, and low oil prices should keep spending power elevated.
- Theme 3: Managements remain devoted to share repurchases - Several firms announced large share buyback programs. S&P 500 YTD repurchase authorizations of $63 billion are at the highest level since 2007.
- Theme 4: Outlook for China is positive despite recent turmoil - Managements expect consumers will drive long-term economic growth in China and remain committed to expanding their businesses in the region.
And here are some actual quotes from management teams:
Theme 1: US economy appears insulated from global weakness
Managements are optimistic about US economic growth this year. In contrast, firms expect the trend of tepid global growth will persist. Despite recent equity market volatility, domestic economic conditions appear stable. We forecast above-trend US GDP growth of around 2% in 2016. Low oil prices will weigh on global ex-US GDP growth.
US strong
JPMorgan Chase
We’re not forecasting a recession. We think that the U.S. economy looks pretty good at this point…The U.S. economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the last two years, it has created 5 million jobs. And when you look at the actual household formation, car sales, wage, people working, it still looks okay. Corporate credit is quite good. Small business formation is not back to where it was, but it’s quite good.
Wells Fargo
…while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable…strength and diversity of the U.S. economy benefited our results in 2015. The economy continues to advance with strong job creation including 70 consecutive months of gains in private payrolls, the longest run ever recorded.
United Technologies
I think it’s a relatively solid outlook for U.S. GDP growth, despite what we’ve seen in the equity markets in January.
Southern Co.
Despite economic headwinds from overseas, our regional economy remains in a positive growth mode.
Delta Air Lines
We’re planning for roughly 4% to 5% growth in the domestic region in the first quarter and 1% to 3% growth for the full-year in line with how we see demand and economic growth in the U.S.
Global weak
Sherwin-Williams
Outside the U.S., it appears likely that sluggish market conditions and currency devaluation, particularly in Europe and many Latin American countries, will remain a challenge.
MasterCard
…we expect 2016 to be a continuation of 2015. The U.S. and European economies are showing signs of strength, but the rest of the world remains challenged.
Visa
U.S. outbound spend is strong, but it is offset by continued weakness from Canada, Brazil, and Russia. And more recently, we're seeing increasing weakness in the Middle East and China. We do see some areas of strength such as Mexico, Japan, and New Zealand, but they're obviously smaller markets for us.
Procter & Gamble
Market growth rates on both a volume and value basis have decelerated, due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 3% to 4% globally. We now expect 2% to 3%.
United Parcel Service
Looking at the global economy, conditions remain uncertain, with the first half of 2016 continuing the mixed economic trends from the last half of 2015. Across Europe and Asia, GDP growth was modest in 2015, however, slight improvements are expected this year. At the same time, we continue to see challenges in emerging markets in 2016.
Apple
The macroeconomic environment is weakening. When you think about all the, particularly all the commodity-driven economies, Brazil and Russia in emerging markets but also Canada, Australia in developed markets, clearly the economy is significantly weaker than a year ago.
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Theme 2: Strong domestic consumer demand persists
Consumer strength continues to boost the US economy amid industrial weakness. Improvements in labor market indicators and low oil prices will keep spending power elevated. Consumer and industrial activity within the US have diverged in recent months. Our US current activity indicator (CAI), which is a proxy for US GDP growth, currently equals 1.8%. The consumer components of the CAI indicate growth of 2.9% vs. 0.6% for the industrial components.
Delta Air Lines
We’re pretty optimistic relative to what you read on CNBC, or The Wall Street Journal, or some of the pundits out there that are predicting the future…we see demand as very strong.
Capital One Financial
But let me say this about the health of the consumer…most indicators of the, quote, unquote, real economy, at least in the U.S., continue to look pretty strong. We’ve seen sustained improvement in labor markets in recent months and steady home price growth. Consumer confidence remains solid.
Ford Motor
In the case of North America, in terms of the industry, we don’t see the cycle being over. Obviously, the consumer sector drives a majority of the economic growth. All the metrics we’re seeing, wages growing, jobs growing, low interest rates, low energy costs, those type of things are really putting more spending power in the hands of consumers.
Visa
I think what we're seeing is a very stable U.S. consumer environment. If you look at multiple quarters, all the way through last year and into this year, and you adjust for, as we said, conversions and gas prices, it's been very stable.
Wells Fargo
…with respect to consumers, they have not spent a lot of their gas savings so far. I think they’ll start to spend some more. And the thing for Wells Fargo is 97% of what we do is in the U.S. and virtually everything we do in the U.S. is involving the real economy. And there are pockets of strength. You think of autos, you think of commercial real estate, you think of residential real estate, parts of ag, so middle market. And I’m not going to say it’s robust but we’re really happy.
JPMorgan Chase
We saw strong growth in consumer drivers on the back of improvement in the U.S. economy…
United Parcel Service
…the U.S. remains dependent on a consumer-based economy for growth, while industrial manufacturing continues to be held down by a strong dollar and lower global demand.
Praxair
…we continue to see good demand in consumer-oriented sectors like food, beverage, automotive, healthcare, refining and chemicals.
Union Pacific
I would say, the consumer is spending, there is consumer confidence, household income is going up. There appears to be a shift between consuming on products or goods to spending on services. There does appear to be that shift.
AT&T
In fact, it was a decent holiday season in light of really aggressive competition, but the consumer continued to spend money.
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Theme 3: Managements remain devoted to share repurchases
Several firms announced large share buyback programs. S&P 500 YTD repurchase authorizations of $63 billion are at the highest level since 2007. We forecast total S&P 500 buybacks will equal $608 billion during 2016, 7% higher than the previous year. Corporate repurchases will also remain the largest source of US equity demand this year.
United Technologies
Clearly, the best M&A opportunity we see right now is UTX stock. We’ll continue our share repurchase program as long as we feel there’s a significant discount between the intrinsic value of UTC and the share price.
Norfolk Southern
…our board is very focused on buybacks right now, that's a big part of our strategy, it has been in the past, as we went through.
Starbucks
…given what we saw in the holiday and what we saw in the equity markets, we’ve significantly increased our buybacks to the tune of roughly double already this quarter what we did in the whole quarter last year.
BlackRock
…we are going to continue repurchasing stock in an amount no less than last year.
Delta Air Lines
We have a bias toward applying that to share buyback…we would expect that given the performance that we’re on pace to achieve that our share buyback number will be materially higher in 2016 than it was in 2015.
Johnson & Johnson
During Q4 2015 we used approximately $1 billion to repurchase shares of our stock in connection with our $10 billion share repurchase program that we announced in October.
Schlumberger
In light of our strong tax flow generation, yesterday our board of directors approved a new $10 billion share buyback program.
Chipotle Mexican Grill
…our Board has approved an additional $300 million of share repurchases, bringing our total life-to-date authorization to $1.9 billion. As of January 31, including the new $300 million authorization, we have $478 million remaining to repurchase stock.
Altria Group
We also completed our $1 billion share repurchase program and announced a new $1 billion program that we expect to complete by the end of 2016.
Procter & Gamble
Over the past five years, we’ve returned $60B to shareholders and intend to pay dividends, retire shares, and repurchase shares worth up to $70B over just the next four years.
Amgen
At the end of 2015 we had approximately $4.9 billion remaining under our board authorized share repurchase program. We intend to repurchase an additional $2 billion to $3 billion of shares in 2016 and are on track to deliver our capital allocation commitments to shareholders.
Illinois Tool Works
…based on our ability to tax-efficiently accessed $1.2 billion of non-U.S. cash this month, we’re increasing our share repurchase expectation by $1 billion to approximately $2 billion.
Apple
We also launched our sixth accelerated share repurchase program, spending $3 billion and receiving an initial delivery of 20.4 million shares.We have now completed over $153 billion of our $200 billion program, including $110 billion in share repurchases.
NIKE
…we recently announced a four-year $12B share repurchase program.
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Theme 4: Outlook for China is positive despite recent turmoil
Managements expect the rapidly rising consumer population will drive long-term economic growth in China. As China transitions from an industrial growth economy to a consumer-driven economy, firms view the Chinese market as an attractive opportunity.
Starbucks
First let me say that China is here to stay…Short-term market gyrations, however, should not be confused with actions that will lead to long-term sustainable economic gain, especially as China moves to a consumer-driven economy. I strongly believe that the Chinese government’s commitment to true economic reform is genuine and that its goal of doubling 2010 per capita income by 2021, resulting in a middle class in China approaching 600 million Chinese people, or almost twice the size of the entire current U.S. population, is attainable. We are taking a long-term view on how we will build our business in China…
NIKE
…while North America is currently one of the larger growing ones, China has a tremendous, tremendous growth opportunity. We can see that as being one of the most connected markets out there.
Ford Motor
But our view is that the market will grow in China this year, and a lot of that on the back of the response we’ve seen from the purchase tax reduction.
Apple
Beyond the short-term volatility, we remain very confident about the long-term potential of the China market…
Procter & Gamble
…we see significant opportunity remaining in China with those very attractive growth rates, albeit somewhat slower than they were two and three years ago, with the conversion from a manufacturing to a consumption-based economy, with the dramatic potential that exists as a result of larger family sizes from the possibility of two children vs. just one, and with the premiumization of the market…
Johnson & Johnson
…we’re optimistic about China going into 2016. Our plans are for improved growth in China in 2016.
Delta Air Lines
In the Pacific, we expect to see good improvement in profitability again in 2016, as we reallocate additional capacity from Japan to growth markets, primarily China, the important pillar of our Pacific and overall company long-term strategy.
United Technologies
China will be down for 2016, but let’s keep China in perspective. While it’s certainly experiencing some challenges as it grapples with reform and rebalances its economy from an industrial growth story to a consumer consumption economy, its long-term growth prospects remain strong.
Visa
And while we are believers in China for the long-term, the domestic volatility is creating increased headwinds for us.
Praxair
Consumer-related industries are still performing well in China as we continue to see good demand for things like transportation fuels, food, healthcare, environmental solutions and plastics…
Coach
It’s important to note that we still see the Chinese tourist as an increasingly large part of our business globally and have experienced the strengthening in Chinese tourist spending, notably in Japan and Europe. We are staffing into this trend, increasing the number of Mandarin-speaking store associates in these geographies.