It's Not Just Soaring Inflation: Here Are The 4 Main Themes On This Quarter's Earnings Calls

By now everyone - except a very special group of idiots residing at the Marriner Eccles building and their media propaganda lackeys - is aware that inflation in the US is soaring to the point where some such as BofA, are speculating that the US is facing a period of "transitory" hyperinflation (if BofA is right it would be remarkable, as it would be the first-ever case in human history of "transitory" hyperinflation that does not result in a monetary reset).

Those most aware of the soaring prices - in addition to those who have to pay them - are corporations themselves, who as we profiled earlier this week, have been hit with surging input costs and have been quietly and not so quietly passing them on to consumers.

As Goldman notes, rising prices and the implications of rising input costs for profit margins was among the primary topics of discussion in many of the just concluded Q1 earnings calls, including those of ALLE, AVY, CAG, CARR, CAT, CHD, CL, CLX, CMG, CTAS, F, FAST, FBHS, FCX, GPC, GWW, HAL, IEX, IP, KHC, KMB, KO, LKQ, LW, MAS, MHK, NWL, ORLY, PH, PNR, SHW, SNA, TAP, TFX, TXT, WHR.

But it's not just inflation. As Goldman writes in its latest quarterly Beige Book publication, in which the bank gathers anecdotal evidence of fundamental and thematic trends from the earnings transcripts of S&P 500 companies, there were three other themes in addition to inflation, namely the COVID recovery; buybacks; and labor trends (incidentally, of the companies that have already reported which is 85% of total S&P 500 market cap, 70% beat estimates by 1 standard deviation or more vs. the 15 year average of 48%).

Here is a snapshot of Goldman's key observations:

  • COVID recovery. Many firms are optimistic that pent-up demand will drive upcoming growth, while others have already seen notable strides in recovery.
  • Inflation. Companies discussed their varying approaches to profit margin protection in the face of rising costs. Many firms are relying on price increases to combat inflation. Meanwhile, other firms indicated they will prioritize cost-management strategies to preserve margins.
  • Buybacks. As a result of stellar earnings results and the strong economic outlook, many companies have increased or reinstated share repurchase programs.
  • Labor market. Firms are having difficulty finding labor, particularly in transportation and hospitality. In response, some companies plan to ramp up hiring or bring recalled employees back to work sooner than expected. Few companies commented on the potential implications of a minimum wage hike, and sentiment varied on this topic.

There was one bonus theme: cryptocurrency. According to Goldman, a handful of companies discussed cryptocurrency in earnings calls this quarter, and following strong public interest, some companies (mostly within Financials) are already offering services that provide exposure to cryptocurrency or accepting it as payment, either through internal platforms or through third party cryptocurrency ventures.

We go down the list of observations, starting with...

Theme 1: The COVID recovery

The US economy is recovering from the pandemic on almost all fronts, with Goldman economists’ latest recovery tracker showing the unemployment rate falling to 6.0% and consumer spending rising to 105% of pre-pandemic levels. Furthermore, 40% of the US population has already received at least one vaccine dose, which should support the gradual reopening trend shown below. All of these factors contribute to Goldman economists’ view that US GDP growth should peak at 10.5% this quarter.

(Click on image to enlarge)

This improvement in economic and business outlook has been a common theme in management earnings commentary. Many firms are optimistic that pent-up demand will drive upcoming growth, while others have already seen notable strides in recovery. In particular, companies in COVID-sensitive sectors, such as travel and real estate, are confident that demand will return once lockdown restrictions are lifted. New consumer trends have also emerged, such as changes in spending behavior, which may persist even post-pandemic

Pent-up demand

  • Delta Air Lines, Inc. (DAL): Pent-up demand is also evident, with domestic leisure bookings 85% recovered to 2019 levels and leisure markets more than fully restored. Beyond our own bookings, we see encouraging data points in the broader economy. This includes accumulated savings, restaurant dining, credit card spend, hotel occupancy rates, web search data on travel and corporations announcing more concrete office reopening plans.
  • McDonald’s Corporation (MCD): There’s pent-up demand that we’ve seen when we are able to get a market open or even last year when we had some reopenings that then resulted in closures not too long thereafter as the second and third wave came about... there’s nothing that gives us any concern that as we reopen that we’re going to see the same pent-up demand come back and get the European business moving forward.
  • Domino’s Pizza, Inc. (DPZ): And with COVID loosening up certainly in some places, not as much in others, as it loosens up, it really gives those franchisees the opportunity to release some of that pent-up demand for unit-level investment and growth.
  • Comcast Corporation (CMCSA): We’re also encouraged by the trends we’re seeing across NBCU. Our Parks segment broke even, excluding Beijing, for the second consecutive quarter, driven by remarkable attendance at Universal Orlando. We can see firsthand the pent-up demand for high-quality entertainment and family fun outside of the home, and we remain incredibly bullish on the Parks business.
  • Lamb Weston Holdings, Inc. (LW): I expect at the end of the calendar year, based on some of the data we look at, we’re projecting Foodservice to be back to pre-pandemic levels. And as we’ve seen markets in the U.S., not all of them opened up and just lift restrictions, we’ve seen them approach or get pretty darn close to pre-pandemic levels. Now we need some time to work through overall, the consumer behavior of going back to eat restaurants over a longer period of time. But that gives me confidence that there’s some pent-up demand for the restaurants in our Foodservice segment. And I think we’ll get back to pre-pandemic levels by the end of the calendar year.
  • IQVIA Holdings Inc (IQV): Excluding that fast-burning work that we had in the first quarter, the R&DS business grew mid-double digits and the TAS business grew high single digits, excluding the COVID-related work. The rest of the year, obviously, will be higher than that, again, because we have the trailing impact of COVID we think well into ‘22 and the pent-up demand that needs to be caught up. So all of that helps build momentum.

Signs of recovery

  • American Airlines Group, Inc. (AAL)Small business demand, which was roughly 17% of our system revenue has been improving steadily as vaccination rates have increased and as markets reopen. An increasing number of our largest corporate accounts are coming back to the office and indicating that they’ll be traveling in the third quarter and confirming in-person board meetings, conferences and events for this year.
  • Alaska Air Group, Inc. (ALK): As momentum with vaccine has picked up and travel restrictions have eased, there has been a strong return of leisure demand. We have seen passenger employments move from being down 65% in January to down 35% in April. Today, sustained future bookings are roughly 80% of pre-COVID levels.
  • American Express Company (AXP): We are seeing a faster pace of spending recovery in the U.S. versus other regions. The total volumes from our U.S. consumer and SME customers are recovering faster than other customer types and were up 1% versus 2019 levels in the month of March, even with the continued drag of T&E spend not yet fully recovering.
  • Archer-Daniels-Midland Company (ADM): We continue to see strong demand. I think that as some restaurants and some places are reopening, we started to see food services coming back a little bit. To be honest, we saw that across the company, not only in soybean oil. I would say March orders were significantly better than January and February. And I think we see that continuing in April.
  • Colgate-Palmolive Company (CL): If you start with Asia, the categories are coming back, although still not back to where we were pre-COVID due to some of the store closures that we continue to see across Asia, particularly China and Southeast Asia coming back in terms of a category development standpoint.
  • Starbucks Corporation (SBUX): We are seeing recovery though in those metropolitan areas. I think that’s going to take a little longer for businesses to bring employees back to work and sort of reshift those traffic patterns. But I think very, very positive progress on dayparts and continued progress in terms of both in dense metropolitan located stores.
  • General Electric Company (GE): Healthcare equipment and services continue to be a strength. We saw increased demand as global procedure volumes recovered to pre-pandemic levels.
  • Las Vegas Sands Corp. (LVS): March, we started to experience a pretty meaningful rebound in visitations versus January and February. And as you’ve seen from the figures released by MGTO, that has continued on a similar momentum in April with visitations reaching post-pandemic highs in the mid of April.
  • AvalonBay Communities, Inc. (AVB): We expect a more rapid recovery in move-in rents over the next couple of quarters as people are called back to the office, urban universities announce on-campus learning and the quality of the environment improves when retail, restaurant, entertainment and other services reopen for in-person experiences. We’re starting to see some of that demand already, which is reflected in our asking rents.
  • American Electric Power Company, Inc. (AEP): As we look towards the future, we are seeing our communities starting to rebound from the shadow of the pandemic. Job growth and electric consumption show continued improvement, supporting our view that the economy within our service territory will continue to rebound.

New consumer trends

  • Amazon.com, Inc. (AMZN): Grocery has been a great revelation during the post-pandemic period here. I think people really value the ability to get home delivery. And we’ve seen that as numbers go up considerably pre and post-pandemic.
  • Cboe Global Markets Inc (CBOE): The biggest observation we see is the change in the size of the contracts that are coming into the SPX complex. Those really large trades that we saw before the pandemic have been replaced with smaller order size... and then in the super short-dated and low premium contracts, huge uptick in what we’ll put in a category of traditional retail.
  • Conagra Brands, Inc. (CAG): The adoption of remote work provides a structural increase in the demand for frozen food compared to pre-COVID levels. Importantly, some aspects of the remote workforce adoption are expected to be permanent.
  • Clorox Company (CLX): The key takeaway is versus pre-pandemic levels, cleaning behaviors are still significantly elevated. We’re seeing that in their buying habits.
  • Automatic Data Processing, Inc. (ADP): Despite the pandemic hopefully fading, there will be increased levels of government activity around employment and incentives...that’s a good environment for ADP and for our downmarket business because most small businesses don’t have the time or the inclination to really focus on these things and to take care of these things.
  • Alphabet Inc. (GOOGL): Consumers are spending more time online. They’re buying more online. They were willing to try new brands, and they’re eager to support local businesses, SMBs.
  • Carrier Global Corp. (CARR): People are much more in tune with having safe indoor environment. So to make it visible to them and then how you ultimately use AI and ML to anticipate and correct any deficiencies with indoor environments, is a trend that will withstand the test of time.
  • American Express Company (AXP): You saw more cash-back cards being acquired. There was a 35% jump in premium cards that we saw in this particular quarter, and acquisition of Platinum and Gold cards was well above pre-pandemic levels.
  • LyondellBasell Industries NV (LYB): With government stimulus supporting the U.S. economy and limited options for travel, leisure and public dining, consumers remodeled homes and purchased appliances, home entertainment and vehicles that drove recovery for the industrial economy.
  • Weyerhaeuser Company (WY): Feedback from our customers indicates a shifting trend from small do-it-yourself projects to larger professional remodels. We expect repair and remodel demand to remain strong throughout 2021 as project backlogs continue to expand.
  • U.S. Bancorp (USB): If you end up looking at some of the other categories, the significant amount of stimulus on the consumer side has allowed consumers to be paying down debt.
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