Wednesday, May 14, 2014
A somewhat hotter than expected wholesale inflation reading and a
couple of mixed earnings reports provide the backdrop for today's
stock market action. The wholesale inflation report doesn't
necessarily mean that the retail inflation number (CPI) coming out
on Thursday will show similar spike, though some signs of
inflationary pressures will not necessarily be bad. The bond
market's tepid reaction to today's PPI report shows that it isn't
overly concerned about the inflation situation, at least not yet.
On the earnings front, we got reports from
Deere & Co
) this morning, while
) will report after the close. Deere's earnings and revenues were
below the year-earlier level, though effective cost controls helped
the farm-equipment giant beat top- and bottom-line estimates.
Equipment sales were down -10% in Q1, with North American sales
down -12% from the year-earlier period. Crucially, the company is
guiding towards a bigger drop in equipment sales this year, with
soft agricultural commodity prices weighing on equipment demand.
The Macy's report was similarly mixed, with the company beating on
EPS but missing revenue estimates. Importantly, the company
reiterated full-year guidance and raised quarterly dividend by 25%.
Macy's has been a strong performer in the retail space, though the
sector as a whole hasn't being doing that good on the earnings
front. Total earnings for the 55% of the retail sector's total
market capitalization that has reported Q1 results already are up
+3.1% on +6.3% higher revenues, with only 39.1% of the companies
coming ahead of EPS estimates.
The lack of earnings growth for the retail sector despite revenue
gains spotlights the broadly promotional environment and the
sector's margin challenge. Beyond retail, margins have held up
strongly for the corporate sector as a whole, though today's
wholesale inflation report points to challenges down the road. If
companies can't pass on rising costs to consumers due to
competitive pressures, it will eventually show up in contracting
Corporate margins already remain in record territory, but consensus
estimates expect them to steadily keep expanding, albeit at a
slower pace in the coming periods. But margins have historically
tended to revert to the mean and expecting them to continue
expanding may not be reasonable. If we have to see earnings growth
in the coming quarters, we will need to rely more on top-line gains
and less on continued margin expansion.
Director of Research
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