U.S. Businesses Demonstrating Widespread
Focus on Restructuring and Efficiency
Analysis of S&P 500 2018 earnings transcripts shows fading
exuberance among corporate executives as the year progressed,
according to Gartner, Inc. Several sectors are undergoing an
earnings recession, and efficiency and restructuring initiatives
are increasingly common.
“S&P 500 company executives are concerned about the risks
and uncertainty from government interventions rather than
suspecting any global macroeconomic downturn in the near term,”
said Tim Raiswell, vice president at Gartner’s finance practice.
“Talk of capital and cost-efficiency programs was increasingly
common in earnings calls as 2018 progressed.”
Economic Downturn?
“Mentions of the words ‘downturn’ and ‘slowdown’ were four times
more likely to appear in earnings call in 4Q18,” said Mr. Raiswell.
“Yet it’s important to consider that 4Q18 brought relatively
extreme drops in stock prices. After 10 years of economic
expansion, it’s not surprising to see analysts asking company
executives about their preparations for cyclical economic
weakness.”
Most executives, however, remained optimistic about the U.S.
economy in 2019. The companies most exposed to China were more
likely to report demand weakness in 2018, or predict it occurring
in 2019. Sentiment was particularly positive in the technology and
communications sectors.
“Even while expressing a broadly positive economic outlook, many
of the world’s largest companies are starting to behave as if they
are in a recession,” said Mr. Raiswell. “Ford, Pepsi and P&G
are all recent high-profile examples of companies announcing
large-scale efficiency programs.”
Top Concerns
The most commonly cited economic concern was the slowing Chinese
economy. This theme emerged strongly in 4Q18 and has since picked
up momentum in 2019 earnings calls. Much of this concern for China
and the wider global economy outside the U.S. was more related to
unpredictable government interventions than to any strong
conviction of underlying economic weakness.
Common U.S.-related concerns were the recent government
shutdown, tariffs and trade policy uncertainty. Worldwide political
issues cited were Brexit and the fractious political landscape
within the Eurozone, as well as concerns in the Middle East and in
South America.
“Given the lack of realistic precedents in many cases, all
parties are largely guessing about the extent to which political
rhetoric will become firm policy and what the impact will be on
companies’ order books,” said Mr. Raiswell. “In this uncertain
environment and after a long stretch of expansion since 2009, a
significant number of leading firms are taking a recessionary
stance and making preparations to capitalize on a downturn rather
than be a casualty of one.”
The growth of nonbank lending emerged clearly in financial
services earnings calls. Nonbanks offer high-risk loans to
consumers at prices that many banks are not willing to match. This
strong competition is why the theme emerged in earnings
conversations.
“While many economists suspect that the next U.S. recession will
take a different form than the financial liquidity crisis of 2009,
there should be concerns among CFOs and treasurers that this growth
of nonbank lending poses a risk to the U.S. financial system.
Nonbank portfolios tend to be built on higher-risk loans to
low-income clients. A combination of this phenomenon and any future
easing of banking and lending regulations could spell trouble for
the global economy in the next few years,” said Raiswell.
Winning in the Turns
Many large firms reported that cost management initiatives are
well underway, largely targeting overhead categories such as
marketing, advertising and finance, as well as direct industrial
production costs. For example, P&G, Estée Lauder, Whirlpool and
others all detailed significant firmwide productivity programs.
Several vehicle manufacturers, such as Honda, Ford and Nissan,
began initiatives to consolidate their production in fewer
facilities to drive efficiencies. Many more firms reported
deliberately lower capital expenditure than expected in 2018, as
growth capital was reallocated.
“The CFO’s posture is critical now. Gartner cautions against a
‘business as usual’ approach that fails to change a winning formula
when faced with turns in market direction,” said Mr. Raiswell.
“While signs of early preparation bode well for company
performance, if a downturn appears, this preemptive behavior does
raise questions. How much further will executive teams have to cut
costs if demand plummets, and will this take the form of
more-drastic forms of restructuring, such as layoffs and
divestitures?”
Gartner clients can read more in “Financial Strategy Trends and
Sentiment Review: Consumer and Technology Sectors.”
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