AY: Monday Morning Musings - Looking At Sales Trends 07:39am EDT 20-May-02 Salomon Smith Barney Intl (Tobias M. Levkovich) SALOMON SMITH BARNEY Industry Note
Institutional Equity Strategy Monday Morning Musings - Looking At Sales Trends
May 20, 2002 SUMMARY * We examined quarterly sales trends of each S&P 500 Tobias M. Levkovich sector * Data for the most recent quarter suggests that we may be at or near an inflection point * Energy, Utilities, Materials and IT showed the worst declines, while Telecom Services were not as bad as might be expected * Not surprisingly, the Consumer Discretionary sector has been able to maintain its sales growth * Recent data suggests the consumer remains likely to hang in there OPINION
When trying to assess business trends, we often look at many big picture items such as GDP figures, new orders indices, consumer or business confidence and earnings, but we rarely, it seems, look to sales. Yet, we can review historical patterns to understand the way in which the market or groups perform. As can be seen in Figure 1 below, when we look at the S&P 500 constituents that were in place back in 1990, we can see that their combined sales growth in 2001 was not as severe1y hit as was the case in the prior recession, possibly due to mergers, overseas trends, etc. But, when we look at the more recent quarterly data (Figure 2), we can see that declines started in 3Q01 and have continued through 1Q01 for the 471 constituent companies that have reported thus far. Indeed, the year over year dip actually improved in 1Q02 vs. the reported 4Q01 decline. Thus, we truly may be at that inflection point that we have been projecting for the market over the past two months. Indeed, we find it interesting that many market doubters seem to have seized on last week's market strength to shift from their more bearish postures over the weekend based on our purview of articles in various financials publications and web sites.
Figure 1
Source: Factset
Figure 2
Source: Factset
Interestingly, when we break this down to sector level views, the quarterly data is quite revealing (see Figures 3-6). The big declines in sales have come in the Energy sector (due to lower commodity prices), Utilities (where some sales now are being questioned), Materials (as production slumped) and Information Technology (as the bubble burst). Moreover, the Health Care and Industrial sectors slowed meaningfully. The funding mechanism, Financials, suffered as well. Fascinatingly, in Figure 7, we show that despite all its woes, the Telecommunications Services sector was not as bad as many would have assumed, probably due to the large established players, including AT&T and the RBOCs as well as merger activity.
Figure 3
Source: Factset
Figure 4
Source: Factset
Figure 5
Source: Factset
Figure 6
Source: Factset
Figure 7
Source: Factset
Not surprising, given the resilient consumer, we can see that the Consumer Discretionary sector (Figure 8) has been able to maintain its sales growth and we continue to consider the consumer to be in much better shape than many perceive. As we demonstrate in Figure 9, the "adjusted" savings rate used by the Bank Credit Analyst shows that significant buying power still exists. The adjustments reflect 401(k)'s, pension income, capital gains and amortization of durable goods purchases over the life of those assets, essentially determining the savings rate from the perspective of the consumer rather than the government's view. In fact, the last time we witnessed such strength was back in 1986 when debt service as a percent of disposable income was around current levels (Figure 10) and the consumer failed to back off then also. Thus, once again, we see that the current consumer experience is not an anomaly tied to questionable assumptions of housing bubbles. Accordingly, the strength in April retail sales and auto sales is not as unsustainable, as many might think. In fact, the consumers' wherewithal is not collapsing as some have claimed and the recent Manpower survey is encouraging on the labor front too. Consequently, the consumer sentiment numbers released on Friday and the strong results posted by the likes of Wal-Mart, Kohl's and JC Penney might reflect some of these fundamentals that we think many investors have either overlooked or simply do not really understand.
Figure 8
Source: Factset
Figure 9
Source: Bank Credit Analyst Research
Figure 10
Source: DRI
Note that new hiring could also provide some support for IT sales as well given the historical relationship between employment and technology investment. Thus, even the fears related to capital spending being in a downturn could begin to ease late this year, if history is any guide, given that both higher profits and more jobs could turn the tide on tech investment patterns. This would coincide with the normal lag after profits recovery, which we anticipate begins in 2Q02 (with capex recovery beginning two quarters later). In this context, Dell's commentary on initial signs of life in tech spending might not be a false dawn nor was the semi equipment's strong book-to-bill numbers. Accordingly, we think that things are on track but investors continue to want evidence and are acting in a reactive rather than anticipatory mode after being "burned" the past two years. As a result, we remain bullish on equities as we have been since February 19th, 2002.
Companies Mentioned:
AT&T (T-$12.87;1M)
Dell (DELL-$27.95;3H)
JC Penney (JCP-$25.00;2H)
Kohl's (KSS-$77.75;2M)
Wal-Mart# (WMT-$58.33;1L)
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