Macro Wrap – “Solid N.A., Improving Asia, Subdued Europe”

by Enis January 15, 2013 7:49 am • Commentary

As earnings season continues in earnest, I have been scouring earnings releases to gauge the expectations among corporate executives for 2013.  PPG is a boring chemicals company that I used to trade as a market maker, and though it might seem insignificant, it’s still a $21 billion market cap company with major operations around the globe.

Here was the key quote from its CEO, Charles Bunch, that I saw from their release yesterday:

Looking ahead, Bunch said he anticipates economic trends will remain varied by region in 2013, with a solid growth bias remaining in North America, improving growth prospects in Asia, and subdued activity levels in Europe.  “We will continue to aggressively manage our businesses, including delivering incremental 2013 savings of between $70 million and $80 million from our previously announced restructuring program and targeted price increases in our coatings businesses, as we work to fully recapture inflation from the past two years,” he said.

In my mind, that sums up the corporate executive mindset quite well.  The base case for 2013 expectations is that U.S. growth remains the driver of profits, and Asia provides a nice kicker, while Europe lags.  In addition, cost control becomes increasingly important since revenue growth is stagnating (PPG grew revenues 2% in 2012), and price increases even enter the discussion as companies fight to maintain margins at historically high levels.

Gross margins at PPG have gone from 31% to 37% in the past 5 years, which may not seem like much, but for a chemicals company with myriad competitors, that’s an incredible achievement, and one of the main contributors to a rocketing stock price.  20 year monthly chart:


Screen Shot 2013-01-15 at 7.38.31 AM


The stock has gone from around 30 to 140 since the March 2009 low.  And that’s for a chemicals company that traded between 40 and 80 for more than 10 years.  That’s the value of record margin expansion.

I view the margin story as the crux for 2013 corporate earnings.  Without revenue growth, can companies continue to squeeze more earnings out of each dollar of sales?  The answer to that question likely determines the direction for stocks this year.

Markets overnight:

  • Asia mixed, with Japan the strongest market again, up close to 1%, but Taiwan, Korea, and Hong Kong all finished lower.  USD / JPY moved lower by 1 big figure after comments by Japan’s economy minister Amari
  • Europe has traded in the red for most of the session, down 0.5% now.  SPX futures down in sympathy, -0.5% as well.
  • Retail Sales and PPI data out at 8:30 am.
  • LEN reported stronger than expected earnings across essentially all metrics, but stock is trading down 1% as expectations were quite high.