What really is the focus for America’s companies? Their quarterly results give one picture, but we’ve dissected what they say to the investment analysts afterwards. We’ve studied transcripts of nearly 20,000 earnings calls from 600 companies, and the latest analysis highlights five key themes: tariffs, wages, European data regulation, Brazilian strikes and the ASC 606 accounting standard.
But not all firms or industries are affected equally – and some may be offering excuses rather than explanations for weak profits. Our analysis allows us to quantify what the companies are telling Wall Street.
We’ve used natural language processing to analyse the quarterly earnings calls for the constituents in the MSCI USA stock index since 2010. We’re not looking only for the most frequently used words and phrases, but also for terms being used much more often than usual.
Corporate earnings calls in the second quarter of 2018 identify five key themes:
- Trade and tariffs were mentioned by more than 120 companies – 20 per cent of the index constituents. That is unsurprising, given the escalating US-China trade war, but the discussions confirm the main risk is not to margins, but the potential spillover to global growth.
Only 30 per cent of companies mentioning tariffs said they would absorb the costs; others, particularly in the capital-goods sector, propose to pass them on to customers or change their supply-chains to avoid them. However, nearly 90 per cent of consumer staples firms said they would have to absorb the costs.
But while only 9 per cent of technology companies discussed trade protectionism, this sector has the largest exposure to China – 18 of the 21 companies with more than 20 per cent of sales there are IT firms.
- Discussion of wages peaked in the first quarter of 2018 after US tax reforms encouraged one-off rises, but the subject remains hot. We think the fear is overdone at the aggregate level – a 1 percentage point increase in wages above the levels already priced in reduces earnings by about 1.5 points.
But our screening identifies the most vulnerable sectors and companies: retailers have a higher sensitivity to wage pressures, for instance, and they discussed the subject most.
- Europe’s General Data Protection Regulation implemented in May was a major talking point for software and services companies. Online advertising for the top four US social-media and internet-retail groups has contributed 18 per cent of growth in the MSCI’s index’s total revenue since 2012, but the earnings-call analysis suggests GDPR may initially affect companies’ compliance costs more than sales.
- Strikes were highlighted by more than 35 companies, most focussing on Brazil's 11-day truckers’ dispute and the resulting supply-chain and delivery disruptions. However, companies may be using the strikes as an excuse to talk down earnings expectations: their repercussions appear overdone.
- The ASC 606 accounting regulation detailing how and when companies recognise revenue has come into effect for full-year 2018 reporting. The impact varies significantly, but software and services firms were discussing it most, allowing our analysis to name the hardest hit companies.
Disclosure and disclaimerMore, collapsed
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Alastair Pinder, CFA and Mark McDonald
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