The Problem With The Forward EPS Hockeystick: Millions Of Americans Are About To Lose Their Jobs

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The Problem With The Forward EPS Hockeystick: Millions Of Americans Are About To Lose Their Jobs

Back on September 30, Q1 2015 earnings were expected to grow by 10% from a year earlier. A few short months later, Q1 EPS (non-GAAP of course) growth was revised to 4%. It currently stands at -2.8%, a number which as we reported a month ago, is the biggest annual drop since 2012. What is the reason for this collapse in EPS?

There are two.

First, plunging crude prices, which after rebounding from the low $40s, have since posted a modest dead cat bounce to the upper-$40s, but are nowhere near enough to allow quarterly EPS growth to resume its historic pattern of growing in the high single, low double digits. The devastation that has resulted in the Capex of the shale sector including the already ramping up layoffs of energy workers, extensively documented here, needs no further commentary.

Second, the surging dollar has led to a drubbing for corporate profitability, and one needs merely to glance at some of the earnings call transcripts of the multinationals to realize just how much of an impact the strong USD has become.

“Finally, we do see currency as a continued headwind. We factored into our guidance the headwind of approximately $0.15 to $0.20, which was roughly the same rate of devaluation we experienced in FY 2014.” –Monsanto (Jan. 7)
“Before I share with you some of the highlights from the quarter, let me provide some background on the impact to our business from the volatile foreign exchange rates. Nearly every currency we do business in weakened against the U.S. dollar when compared against Q3 last year, last quarter or against guidance…These rate changes negatively impacted both the income statement, where we use an average rate for the quarter and the balance sheet, which is translated using spot rates at the end of the quarter. For instance, total revenue would have been $13 million higher using Q3 rates from last year, a $11 million higher using rates from last quarter, and $3 million higher using the rates given in September for guidance.” –Red Hat (Dec. 18)
“Turning now to revenues, net revenues for the quarter were $7.9 billion, an increase of 7% in U.S. dollars and 10% in local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter.” –Accenture (Dec. 18)
“Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $310 million or up about 7% from the year-ago period…Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for this segment this fiscal quarter.” –ConAgra Foods (Dec. 18)
“And as I mentioned, foreign exchange lowered reported sales by 2 percentage points.” –General Mills (Dec. 17)
“The as reported numbers were heavily impacted by the strengthening of the U.S. dollar in comparison to other currencies. Total revenue saw a 4% currency headwind which would double what it was at the time of my guidance.” –Oracle (Dec. 17)
The problem is that, as noted above, the bounce in WTI has since peaked and after hitting the low $50s, is once again on the way down, suggesting even more pain for the energy complex. Furthermore, with the Fed widely expected to hike in the summer even as 20 central banks around the globe have eased in just the past two months, the dollar is hardly expected to weaken materially at least until the Fed reverses course on its tightening intentions, which may take a significant period of time.

So what does all that mean for EPS, forward multiples and the market? In one word: hockeystick. In two words: epic hockeystick.

The chart below is from the latest factset earnings insight, and it shows that after sliding 2.8% in Q1, earnings are expected to soar dramatically, posting unprecented Q/Q growth, and return to growing at 7% clip in the fourth quarter….More Here

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