Gavekal Capital: Putting Declining Sales Estimates In Context

Tuesday, February 24, 2015

Putting Declining Sales Estimates In Context

We track analyst estimates in a variety of ways. We look at growth rate expectations over the next four years. We also measure the percent change in the level of USD estimates across various time frames. We also track the difference in growth rates now versus three months ago. Finally, we look at the percent of companies that are experiencing a positive earnings revision over various time frames.

Today, let's look sales estimate data from an equal-weighted, industry perspective. There are 24 industries in the MSCI World Index. Currently, only 9 of the 24 industries are expected to have positive sales growth in the next fiscal year. In fact, the MSCI World Index on average is expected to have sales decline by 80 basis points over the next fiscal year (FY1). Two industries stand out in terms of their optimistic sales growth expectations. Semiconductors & Semiconductor Equipment is expected to grow sales by 12.4% over the course of the next fiscal year. Software & Services is expected to grow sales by 11.4%. The growth rates for these two industries are nearly twice as high as the industry with the third highest expected sales growth rate.

Energy continues to have the lowest expected sales growth over the next year. The Energy industry is expected to have sales decline by 9.8% over the next fiscal year. However, analyst currently expect sales to bounce back in a few years as Energy has the highest expected sales growth (9.5%) in three years and the second highest expected sales growth in four years. Therefore, if Energy sales do not rebound (or rebound as strongly) it would seem there is further downside for the Energy industry ahead.

The aggregate estimate of sales in USD has been declining significantly over the past six months. This is good spot in our data to identify the effect that a stronger dollar is having on sales estimates for global companies. For example, over the past six months the USD level of projected sales has declined by 10.8% for the Automobiles & Components industry. Similarly, the projected level of sales for the Bank industry has declined by 10.7% over the past six months. Overall, only 1 out of 24 industries have experienced a rise in their FY1 projected sales over the past six months. That industry is the Semiconductors & Semiconductor Equipment industry and their USD level of sales has only increased by 70 basis points.

Next let's look at the 3-month difference in FY1 estimated sales growth rates. Let's look at the Media industry. Currently, the 3-month difference in FY1 sales estimates for the Media industry is -1.9%. The current growth rate in FY1 sales estimates according to the first table is -1%. This means that three months ago the FY1 sales estimate growth rate for the Media industry was 0.9%. Again, only 1 out of 24 industries has experienced a positive increase in their expected sales growth rate for next year.

Lastly, let's take a look at the breadth of revisions. We accomplish this by looking at the number of companies that are experiencing positive revisions versus the number of companies that are experiencing a negative revision. Over the past six months, only 17% of all MSCI World companies have experienced a positive FY1 sales revision and no industry has had a majority of companies experience increasing revisions. Amazingly, zero Automobile and Component companies have seen an increase in their FY sales estimate in the past six months.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
We offer the Gavekal Knowledge Leaders Strategy in multiple products for global investors. For more information about our product offerings please visit http://www.gavekalcapital.com.
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