Q4'23 Inside The Buy-Side® Earnings Primer®

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Q4’22 Closing the Quarter

As we emerge from the Q4 and FY 2022 reporting period, there are several forces at play contributing toward this varied environment. As we reported last week, commentary suggests commodity inflation is softening, likely settling around the MSD range, on average, for 2023. Supply chains are generally improving (and recalibrating), heightened federal stimulus is supporting growth in some industries, and most sectors have increased their capex YoY.

That said, cost control measures remain squarely in focus, with companies continuing to announce hiring freezes and layoffs. The geopolitical frontier is evolving, and international tensions over Ukraine and Taiwan have reached a feverish pitch. Wage and service inflation pressures are still being felt across many companies, and a once “resilient” consumer is beginning to show strain.

Guidance

  • Across calendar-year companies with market caps greater than $500M, 2023 top-line guidance was decidedly mixed relative to 2022. An equal proportion (25%) Narrowed or Maintained their range relative to last year, with slightly fewer (23%) Widening. 85% of revenue guidance midpoints came in above 2022 actuals.
  • Most earnings guidance spreads were Maintained (31%) or Widened (29%), with far fewer (18%) Narrowing. Notably, 62% of EPS guidance midpoints were above 2022 actuals.
  • Across both metrics, at least 10% of companies opted not to issue annual guidance versus their practice this time last year.

Consensus

  • For the S&P 500, a slight majority of analysts, 53%, increased 2023 top-line estimates, while 44% increased EPS expectations for the same period. That said, roughly 1/3 cut annual outlooks, and ~20% maintained estimates across both revenue and EPS.

Capital Allocation

  • Across the S&P 500, capex saw significant increases, followed by dividends. Total debt levels remained largely flat YoY while buybacks and dry powder saw meaningful cuts. U.S. M&A activity increased in January by 5.8% MoM; however, this figure still represents a 40% YoY volume decline, with 28.8% less being spent on deals compared to the prior month.

Supply Chain

  • In an analysis of selected earnings calls, three classes of supply chain recalibration appear to have been catalyzed this quarter – onshoring, nearshoring, and friendshoring.

2023 Outlook and Macro

  • Growth – Those who are optimistic highlight increased federal investment, improving supply chains, and waning inflation, while others express concern over increased borrowing costs, energy prices, lingering FX pressures, and pervasive geopolitical turbulence
  • Cost Control – Residual cost inflation and a fluid demand environment draw executive focus inwards, resulting in extended expense management actions (incl. hiring freezes and layoffs)
  • Financial Strength – Leaning on robust balance sheets, companies communicate increased growth investments, and, for some, shareholder returns through 2023

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