Deloitte “CFO Signals” Report Q1 2015 – Notable Aspects

Recently Deloitte released their “CFO Signals” “High-Level Summary” report for the 1st Quarter of 2015.

As seen in page 2 of the report, “Ninety-six CFOs responded during the two-week period ending February 20. Sixty-eight percent of respondents are from public companies, and 82% are from companies with more than $1B in annual revenue. For more information, please see the “About the survey” section of this report.”

Here are some of the excerpts that I found notable:

from page 3:

How do you regard the current and future status of the North American, Chinese, and European economies? Fifty-nine percent of CFOs describe North American conditions as good (near last quarter’s very high 63%), and 64% expect better conditions in a year (63% last quarter). Just 18% regard China’s economy as good (down from 34% last quarter), and only 13% expect improvement (down from 25%). Just 2% describe Europe as good, and only 10% see it improving in a year. Page 8.

What is your perception of the capital markets? Forty-six percent of CFOs say US markets are overvalued (down from 61% last quarter). An overwhelming 93% say debt is currently an attractive financing option, and one-third of public company CFOs view equity financing favorably (down from 48%). Page 9.

Compared to the past 12 months, how do you expect your key operating metrics to change over the next 12 months?* Revenue growth expectations fell to 5.4% from 6.0% last quarter, mostly due to declining expectations from CFOs in the oil and gas sector. Earnings expectations improved from 9.7% last quarter to 10.6% this quarter.  Capital spending expectations declined slightly to 5.2% from last quarter’s 5.5%, also influenced by lower expectations from the oil and gas sector. Domestic hiring expectations rose to 2.4%, matching their highest level in two years. Pages 11-13.

Compared to three months ago, how do you feel now about the financial prospects for your company? Continuing a string of eight straight prior quarters of positive sentiment, net optimism rose to a very strong +34.4. Forty-eight percent of CFOs express rising optimism (49% last quarter), and just 14% express declining optimism (improving on last quarter’s 16%). Net optimism is again lowest for Manufacturing, Energy/Resources, and Services. Page 14.

Overall, what external and internal risks worry you the most? Economic worries escalated, as did concerns about oil prices and the strength of the US dollar. Internal concerns about execution and availability of qualified talent are also substantial. Page 15.

What macroeconomic indicators does your company most closely monitor? Across industries, the most-tracked indicators are GDP (a lagging indicator) and interest rates (a leading indicator). Other popular leading indicators involve exchange rates, industrial production trends, and a variety of commodity price trends. Other popular lagging indicators are related to employment and inflation. Page 17

*These averages are means that have been adjusted to eliminate the effects of stark outliers.

from page 11:

Revenue and earnings

What are CFOs’ expectations for their companies’ year-over-year revenue and earnings?

Revenue*

Revenue growth expectations declined—largely due to lower Energy/Resources expectations:

  • Revenue growth expectations fell to 5.4% from 6.0% last quarter, and the median is again 5.0%. Eighty-six percent of CFOs expect year-over-year gains (lowest in more than a year), and variability of responses is very high relative to previous quarters. This trend is mostly the result of lower expectations in Energy/Resources.
  • Country-specific expectations are 6.1% for the US (up from 5.9%), 2.1% for Canada (down from 5.0%), and 3.1% for Mexico (down from 9.8%). Canada’s decline is mostly the result of lower expectations from Energy/Resources.
  • Healthcare/Pharma and Technology CFOs have the highest expectations at 8.8% and 7.4%, respectively, while Energy/Resources and Manufacturing CFOs have lowest expectations at -0.2% and 3.0%, respectively.

Earnings*

Earnings growth expectations improveddespite declining expectations from the Energy/Resources sector:

  • Earnings expectations improved to 10.6% from 9.7% last quarter. The median remained at 8.0%, and 79% of CFOs expect year-over-year gains (lowest in more than two years). Variability of responses is the highest it has been in three years (skewed to the high side despite low expectations for Energy/Resources).
  • Country-specific expectations are 12.3% for the US (up from 10.8% last quarter), 3.1% for Canada (down from 4.5% last quarter), and 2.8% Mexico (down from 10.5% last quarter).
  • Services and T/M/E CFOs have the highest expectations at 21.0% and 20.8%, respectively; Energy/Resources and Financial Services are lowest at -1.1% and 5.5%, respectively.

*All averages have been adjusted to eliminate the effects of stark outliers.

from page 13:

Employment

What are CFOs’ expectations for their companies’ year-over-year hiring?

Domestic hiring*

Hiring expectations improved and are again near their four-year high:

  • Domestic hiring expectations rose to 2.4%, up from last quarter’s 2.1% and matching their highest level in two years. The median remained at 1.0%, and 58% of CFOs expect year-over-year gains, just under last quarter’s 60%. Variability of responses is about average for this survey.
  • Country-specific expectations are 2.3% for the US (up from 1.7% last quarter), 1.4% for Canada (down from 2.2% last quarter), and 4.7% for Mexico (down from 6.1% last quarter).
  • Energy/Resources CFOs have the highest average expectation at 4.0% (driven by strong expectations for a few power and utilities companies), while Manufacturing CFOs have the lowest expectations at 0.5%.

Offshore hiring*

Offshore hiring expectations rebounded sharply:  • Offshore hiring rose to 3.1% from last quarter’s 2.0%. The median remained at 0.0%, and 48% of CFOs expect year-over-year gains.

  • Country-specific expectations are 3.2% for the US (up from 2.1% last quarter), 2.5% for Canada (up from 1.3% last quarter), and 3.0% for Mexico (up from 2.0% last quarter).
  • T/M/E CFOs have the highest expectations at 7.0%. Manufacturing and Services CFOs have the lowest expectations at 0.5% and 1.2%, respectively.
  • Increased offshore hiring expectations are consistent with results later in this report that indicate substantial offshoring of operations in response to broader economic trends.

*All averages have been adjusted to eliminate the effects of stark outliers.

Among the various charts and graphics in the report are graphics depicting trends in “Own Company Optimism” and “Economic Optimism” found on page 7.

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I post various business and economic surveys because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these surveys.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2078.74 as this post is written