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This earnings season, sales growth is in short supply

As U.S. corporate earnings season limps along, top line revenue growth is emerging as the scarcest of commodities – and one that's being richly rewarded by equity investors. The trend of low sales growth is already apparent in Canada, where 31 S&P/TSX composite companies have reported this quarter.

Bespoke Investment Group recently noted that while the percentage of S&P 500 companies that are exceeding analyst earnings expectations is within the normal range at 61 per cent, only 45 per cent of companies reporting have exceeded expectations for sales. This rate is only barely higher than it was in the depths of the financial crisis.

Using global data, Bank of America Merrill Lynch chief quantitative strategist Nigel Tupper reports that investors are seeking out firms showing revenue growth; more than any other single corporate metric, a beat for sales will drive a stock's price upwards. Equity investors are just following the laws of supply and demand, paying higher prices for stocks representing strong sales growth because the companies capable of increasing their revenue are becoming harder to find.

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The Canadian earnings season is just under way but some of the same trends active in the U.S. are already visible. Only nine of the 31 S&P/TSX companies have reported exceeded sales expectations – that's a paltry 29 per cent. Six of the nine companies that did beat sales estimates, however, have seen share prices climb significantly. Rogers Communications Inc.'s 6.7-per-cent increase and Goldcorp Inc.'s 9.8-per-cent appreciation since reporting are particularly notable.

The paucity of top-line growth indicates that the global economy is slowing. Companies are capable of increasing earnings through debt refinancing at lower rates and cost cutting; increasing revenue isn't going to be nearly as easy.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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