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What North America’s CFOs are thinking - and doing

CFO Signals by Deloitte - 1st Quarter 2012.

Optimism and earnings growth despite stalling revenue…but for how long?

Since our last survey, several macroeconomic factors have been improving – or at least stabilizing. Unemployment numbers have been mixed but directionally positive. Corporate earnings have been leveling off but still largely trending upward. European debt issues linger, but there appears to be rising expectation of (or at least hope for) improvement. And broader market sentiment has improved, with Dow and S&P 500 valuations rising about 15% since our last survey.

CFO optimism seems to have followed suit, rising markedly after two quarters of sharp declines. But what is not clear is whether CFOs are optimistic in absolute terms, or just optimistic relative to where they were over the past two tumultuous quarters. Continued declines in year-over-year revenue may suggest the latter, but rising expectations for earnings, capital investment, and domestic hiring appear to indicate that many companies are ready to start pushing forward again.

Earnings gains outpace revenue gains
Net optimism (the spread between CFOs citing rising and falling optimism) turned negative near the end of last year – to the tune of a stunning -24 percentage points in 3Q11 and another -9 points last quarter. But the “good” news is that multiple quarters of rising pessimism make it easier for optimism to improve, and that is what happened this quarter.
In fact, net optimism rebounded sharply to +48 percentage points this quarter, with 63% of CFOs reporting increased optimism and just 15% reporting more pessimism. And the sentiment appears to be continent-wide this quarter, with the U.S. at +40, Canada at +57, and Mexico at +73.
Rising optimism is clearly reflected in CFOs’ earnings growth expectations. After bottoming out at 9.3%* in the third quarter of last year, expected growth rose to 10.1%* last quarter and to 12.8%* this quarter. Rising variability of projections, however, indicates substantial difference of opinion.
But sales growth projections continued their downward trend. CFOs’ expected 5.9%* gains are a new low for this survey, and the U.S. expectation is just 5.2%*. This begs the question, “How long can companies expect earnings to outpace sales?” Eight consecutive quarters of this dynamic appear to suggest companies believe their cost-containment strategies can make up for slowing sales growth – perhaps through some combination of focusing on higher-margin businesses, exiting businesses outside core competencies, reaping benefits of efficiency improvement efforts, offshoring of resources, and expectations of declining input costs.

Growth and investment up along with domestic hiring (finally)
In line with their rising earnings expectations, CFOs’ investment and hiring expectations appear to reflect improved optimism. CFOs now cite a nearly 60% strategic focus on revenue growth (mostly concentrated within existing markets) and just a 25% focus on cost reduction (mostly focused on direct costs). They are again mentioning prioritization of investments among their top challenges, consistent with their capital investment growth expectations, which rose from 9.6%* last quarter to 12%* this quarter. Similar to the case for earnings, however, rising variability indicates substantial difference of opinion.

In contrast to the last two quarters, companies’ growth plans appear to be spurring hiring at home. CFOs’ expected domestic hiring gains of 2.1%* are more than double last quarter’s survey-low 1.0%*, and just over half of CFOs project gains. U.S. CFOs’ projections rose from 1.4%* last quarter to 1.8%* this quarter, and Canadian projections rebounded from just 0.7%* to 3.7%* (Mexico trails at 1.3%*). But as companies look to hire more staff, about one third claim difficulties finding the right talent – consistent with previous survey findings that indicated the skill sets companies need are not the same as those they may have laid off.

Similar to rising earnings projections, growing investment and hiring expectations raise questions about reasons for confidence as revenue appears to be leveling off. Perhaps companies are focused on anticipated growth that is more than a year away, or perhaps they are simply more optimistic than they should be.

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Mercredi 30 Mai 2012

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