Wednesday, July 27, 2011

US Corporations Survive the "Great Recession"

The recession has been often in the news with concerns about economic recovery.  Although the "average person" (see previous post) probably has not yet seen much in the way of recovery, US Corporations never really felt the great recession!  If you are surprised, read on......

To make this assessment, I used a database of 88 US Corporations' Revenue and Earnings per Share (EPS) which were obtained from their SEC filings on a quarterly basis (10Q Filing).  Some companies are from the NASDAQ and some from NYSE, with most sectors being covered.  To see a complete listing of these check out my website and the tab "Examples" http://sustainthegain.com/examples.asp?page_id=mod_companies_list 

In addition to the SEC Filings, most companies also create a Quarterly Earnings Release, where using Index vs Year Ago, they try to explain the most recent results.  I always wondered if any of their conclusions could be supported with sound statistical analysis of this same data.  This curiosity led me to create this database for my statistical analysis of their Revenue and Earnings.  We all know that these results vary from quarter to quarter, but the important question is: "Is the most recent quarter STATISTICALLY DIFFERENT from the preceeding quarters.  If Revenue is up 3% from the same quarter of the previous year, the company leadership will tell you all the great things they have been doing to create this improvement.  Likewise, if Earnings are down 5% from the same quarter a year ago, those same leaders will be happy to explain what misfortune has befallen them beyond their control.  Never have they done the simple task of determining if this 3% up or 5% down is statically relevant, because only then is an explanation needed and meaningful. With this a backdrop, lets get on to the "Great Recession".

Most experts agree that the current Recession began 12/07 or 1/08.  I fit an exponential growth line to the quarterly data of either Revenue or Earnings per Share (EPS) to determine if the result was experiencing "steady" growth.  I also established plus/minus 3 sigma boundaries for this best fit line to determine if any one quarter fell outside these statistical boundaries.   But the most important assessment of these graphs is to find 7 or more quarters in a row above or below the best fit growth line as this determines if there has been a SYSTEMIC change in performance, rather than a single and unsustainable "bump".  To assess if any of these 88 companies were systemically impacted by the current recession, I determined if  7 or more results in a row were below the best fit growth line beginning 12/07 or later.  Since each company has two reported results, Revenue and EPS, there are 176 results that were evaluated.

In the 6 years prior to 12/07, 36.4% of these 176 financial results showed a systemic drop in performance.  Since 12/07, 40.3% of these results showed a drop, which is not statistically different from the 36.4%!!  SO, NO CHANGE IN FINANCIAL PERFORMANCE DURING THE RECESSION.  In fact, 18% of these 88 companies showed systemically better results during the recession!

Let me show you some examples.  First, is Amazon that showed no change in Revenue or EPS performance during the recession.


As you can see, the Compound Annual Growth Rate (CAGR) of 29.0% for Revenue has not changed since 2003.  The variation has increase along with the actual values, but the growth has been consistent.


Likewise for EPS, the CAGR of 29.1% is also unchanged since 2003.  Notice that there was one quarter of Jan 05 that was uniquely high and does require an explanation.  Otherwise the conclusion you reach is that Amazon is well organized to grow 29.1% EPS with no single quarter being better or worse than another since Jan 05.

McDonald's is a case of both Revenue and EPS being systemically hurt during the recession.  To know if the recession caused this systemic change would require additional study, but be assured that in their Quarterly Earnings Release, the recession is front and center in their explanation!


As you can see, the quarters after 12/08 are all running below the previous best fit growth line of 7.5% (the green line).  Although the actual revenue numbers got smaller, the CAGR during the recession is still 6.8% but a systemic drop none the less.



In the case of EPS for McDonald's, the systemic drop occurred 12/08 as with Revenue, and the current CAGR is a healthy 14.9% with slightly less variation than prior to the recession.


Delta Airlines is an interesting example since their results have gotten better during the recession.



Delta Revenue systemically rose on 12/08 and the CAGR increased as well to 9.7%.  Remembering Delta bought Northwest Airlines, the combined Revenue began being reported 5/07, but the statistical, systemic shift did not happen until 12/08, 6 quarters later.  To be clear, the recession did not HURT them!


EPS is not complicated by the merger of financials with Northwest, but you can see that a run of 11 quarters above the historical average (green line) began in 7/07, shortly after the combined financials. However, the last 8 quarters all are above the Upper Limit (blue line) which might indicate that the EPS got stronger 6/08, during the recession.

Looking at this same data by sector, Healthcare and Financials both showed statistically more "help" during the recession than all the other sectors.  To note, Healthcare also show less "hurt" during the recession than the other sectors.  Think of the sectors "helped" by Government stimulus!  Consumer non-cyclical also showed less "hurt" and more "help" during the recession as well without Government support.

Bottom line, the recession has not changed the financial performance of the 88 companies that I track.  The percent of Revenue and EPS results that went down prior to the recession is the same as these results that went down during the recession.  A conclusion you might reach from these data is that Revenue and EPS productivity went up during the recession as unemployment went up.  Can this level of productivity be sustained into the future or will these companies begin to hire again soon?

Friday, July 15, 2011

Were US Businesses Affected by the "Great Recession"?

I have been working on downloading SEC filings of about 85 US Companines and then statistically analyzing these quarterly results to see if during 2008, either their Revenue or Earnings were affected negatively.  I did a similar analysis after the 2001 terrorist attack to see who was negatively impacted.  For example, several of the airlines were already in decline prior to this event, however they wasted no time in blaming poor business performance soley on 9/11!

I have only gotten through the "A's", which is 12 companies (24 business results with Revenue and Earnings).  Of these 15 of the 24 results were unaffected or improved during 2008 with one company having results dropping off in 2007.  However, you can bet that Quarterly Earnings Releases are full of the difficulties confronting them during 2008 and beyond! 

Hope to have the other 70 companies finished soon, so come back in a couple of weeks.