This earnings season has already provided plenty of evidence that an earnings and economic slowdown is upon us. The trend in earnings estimates for numerous companies in the consumer and industrial sectors clearly reveals very negative trends. And, not surprisingly, its been caused mainly by higher gasoline prices for consumers and the slowing real estate construction market.
The first signs of a slowdown always come from the "consumer discretionary" companies – those companies who sell things people don’t really need, but want. In that regard, the cruise industry has always been a leading indicator of consumer sentiment. And tellingly, Carnival (CCL) has disappointed investors not once, but twice, this year. Carnival reduced its earnings guidance during the first quarter and then again several weeks ago because of weak bookings and higher fuel costs. While some analysts attribute the miss to the expectation of a more active hurricane season, I would argue that Carnival has cruises all over the world, not just in the Caribbean. Therefore, the weather argument doesn’t hold water for me. The analysts have consistently reduced their estimates for Carnival since the last quarter…
Source: Baseline
Another industry that has already seen the effects of higher fuel prices and a weakening economy is the casual dining sector. To pay for higher gas bills, consumers are eating out less. Applebees (APBL), Ruby Tuesday’s (RI) and even high-flier PF Changs (PFCB) have all seen flat to down same store sales in the past quarter. And weak comparable store sales has caused analysts to reduce their estimates for many of the restaurant leaders.
APBL has seen it’s earnings estimates cut…
Source: Baseline
…as has the rebounding Ruby Tuesday’s…
Source: Baseline
…and even the high flying PF Changs has come back down to earth.
Source: Baseline
Even the retail sector is showing signs of cracking, especially the very discretionary clothing retailers. Both high-end and basic fashion clothing retailers have seen a drop off in sales over the past quarter – traditional women’s clothing companies such as Talbot’s (TLB)…
Source: Baseline
…to more fashion forward companies such as Chico’s (CHS)…
Source: Baseline
…and even teen apparel companies such as Urban Outfitters (URBN) and Bebe Stores (BEBE) have all seen their earnings estimates reduced.
Source: Baseline
Even traditional men’s fashions have seen a slowdown, as Joseph A Banks (JOSB) reported two months ago.
Source: Baseline
And it’s not just the consumer related companies showing signs of weakness. Many industrial companies, especially those tied to the construction industry, are seeing a slowdown. From building materials to construction parts, several companies in the industrial sector have seen their earnings peak. For example, earnings estimates for the aptly named Building Materials (BMHC) company couldn’t go high enough in the beginning three months of the year. But the trend has peaked and those estimates are now coming down. Interestingly, the estimates for next year already show a 1% decline.
Source: Baseline
Other industrial companies tied to the construction industry are also coming down fast. The well run W.W. Grainger (GWW) company, a distributor of over 800,000 industrial supplies, recently warned that it would miss its earnings estimates. And similarly, Fastenal (FAST), which sells of all things, fasteners such as nuts bolts and screws, has also seen a steady decline in its earnings estimates.
Source: Baseline
Source: Baseline
By themselves, none of these estimate reductions are indicative of anything. In fact many of the reductions are rather innocuous since the companies are still showing year over year growth and bulls would argue that each case is "company specific." However, taken as a whole I think they present a disturbing trend. I’ve hardly ever come across a company that only has one quarter of weak earnings. Company managers and stock analysts are typically an optimistic bunch. They never cut earnings deep enough the first time. So I would expect downward earnings revisions to continue for the remainder of the year.
The only positive that you can hope for is that the economy is only downshifting to lower and steadier growth rate rather than into continuous decline. If this is indeed what economists call a "mid-cycle slowdown" in the economy, then many of these stocks look attractively valued.
The other positive is that as the economy slows, the demand for oil and gasoline will lessen and energy prices will come down. The higher gas prices are clearly affecting consumer spending habits. To save up gas money, consumers have put off clothe purchases, eaten out less and gone on less exotic vacations. And as industrial companies feel the pinch of higher energy prices, they too have delay purchases – which is exactly what GWW and FAST are seeing.
However, I fear that there are more downward earnings revisions to come. Remember, the list of companies above represent the first group of industries to feel an economic slowdown. The stock market’s recent decline is a logical extrapolation of these disappointing earnings trends to other industries that have not yet felt the slowdown. If energy prices remain high and the Fed continues its interest rate tightening campaign, the market will continue to decline until it sees an end to the downward earnings estimate revisions.