On August 8th, Roulston Research held a conference call on the paper and containerboard industry.  The call was held with John Knudsen, former Senior VP at Rock-Tenn Company and former Senior VP at Smurfit-Stone Container Corporation; and John Begley, Principal, Mats View Consulting, former President and CEO at Port Townsend Paper Corporation, and former Director-Strategic Planning at Weyerhaeuser Company.  They sat down to discuss the past trends in the industry, as well as where the industry may be heading.

The call began by the presenters talking about the recent history of the industry.  Much of the industry became consolidated in the hands of a few players, and these companies became too large.  They then had to close some of their plants, primarily the smallest and most inefficient of the plants.  These closings were at least partially due to an increased presence from competitors in Asia.  These foreign competitors, while not very strong in the domestic market, were able to take part of the market share in Asia away, leading to a decrease in exports.  The general restructuring resulted in more decisions being made at a corporate level, where orders would be processed there rather than at plant level.  This allowed plants to become more specialized; only handling one type of order.  This new business model allows for smaller companies to provide better service to their customers, as they can still handle different types of orders at the same plant.  In the future, some of these smaller companies may try to make some acquisitions to grow.  On the industrial packaging side, companies have yet to go through this Renaissance.  They have not gone through the same type of cost cutting measures, and instead have mostly relied on expanding into the consumer products.  Other topics addressed include pricing and South American pulp supply.  If you would like to listen to the full podcast, or engage in a 1 on 1 discussion with either of the presenters, please contact info@roulstonresearch.com.

I recommend a highly interesting review by Brian Wieser (brian@pvtl.com) of Pivotal Research Group on the announced merger of Publicis and Omnicom, as well as Facebook’s claim to be an effective ad medium because of its broad reach in daytime. In his analysis, Brian makes the point that reach by time of day is not the key factor in media planning—the intrinsic effectiveness and cost of the media come first. That is one reason for the Publicis OMD merger—to develop ways to buy online video at a cheaper rate.

But beyond that, Brian also makes this point:

“For a good illustration of how issues like the above play out elsewhere, consider: if marketers could identify the 20 percent of local markets that drive 80 percent of variations in outcomes, wouldn’t they spend more money on local media? It’s a potentially massively more efficient way to spend money, and one which marketers have had the capacity to execute against for many many years…and yet if anything marketers with nationally-skewed corporate structures have been shifting most of their spending towards national media over the same time. Consider that over the past ten years, national mass media owners’ advertising revenues grew by 33 percent while local mass media owners’ advertising revenues fell by 28 percent during the same time. Reasons unrelated to marketing efficiency usually have substantial sway in dictating changes in advertising spending choices across the economy.”

I believe effective media leverage is finding those media and those geographies where there are greater concentrations of product users that can be bought more efficiently—these are the key places to grow share. A simple example of this is the national election, where the Obama for America campaign advertised in only 44 TV markets (using Rentrak data).

The reality is that our country is becoming increasingly Balkanized, with different concentrations of cultures and economies in different parts of the country. The map below from Pew Research shows the importance of religion in people’s lives—the darker the color, the more important. The Northeast and West Coast are clearly different than the Deep South.

This disparity extends to lifestyle and product usage as well. The map below from The Atlantic shows where the 1 percent is concentrated. Those products that cater to the more affluent (e.g. cars) need to consider the disparities in income that allow for people to purchase or lease cars. The real price of automobiles adjusted for inflation as the chart from the Motoramic blog indicates.

The increase in real car prices in the auto industry alone makes understanding the differences in sales across markets and within a medium even more important. Since Rentrak has the same measurement methodology across markets, we can provide comparable TV delivery indices across markets, unlike the sample-based folks who have different methods in different markets. Rentrak can also do this with actual auto sales information, as we have integrated Polk data across our footprint. In addition, within a market (and for the nation as a whole) we can indicate where to find the best TV leverage points for auto buyers. I leave you, dear reader, with a fun example of where to find the Cadillac buyer in Dallas in March in Early Fringe.

I wasn’t a good media planner and I didn’t look at the all the networks and stations we report on. I used the major broadcast affiliates and a couple of cable networks. It isn’t just the news networks like CNBC and FNBC that index high against Cadillac buyers. Affiliates like CBS and MeTV also have high concentrations. Unfortunately, the few liberals in Dallas on MSNBC don’t seem to be lovers of Cadillacs.

Bottom line, Brian is right. Leverage in media can be found across markets, within markets, and across media. And Rentrak, with its Advanced Demographics can help with that leverage.

Bruce Goerlic is the Chief Research Officer at Rentrak,which is  the global standard in movie measurement and your TV Everywhere measurement and research company. He has been in the research end of the marketing business for more than 30 years primarily on the ad agency side, with my last stint prior to Rentrak in the role of President, Strategic Resources Zenith Optimedia North America. Somewhere along the way he morphed from young Turk to old fogey. Now that he has grey hair and is horizontally-challenged, he can speak with some authority on advertising and research issues – which I will do from time-to-time on his blog located at http://brucegoerlich.com/2013/08/06/the-value-of-media-leverage/. You can also learn more about Rentrak at http://www.rentrak.com/.

A recent visit with Bob Evans (BOBE) management gives us confidence that the company has created a new trend line for growth and earnings. As a paradigm changing company in restaurants they have become a thought leader with a faster entry than other restaurants in the fast casual market. Unlike others starting new concepts, BOBE had the foresight to design take out and bakery into the new store concept in effect creating a fast casual concept while substantially increasing their in house dining experience. The concepts have been so successful and improved same store sales that they have accelerated all stores to be completed in their refresh($225,000 per store) in the next 12 months. Then new store builds will accelerate $2-2.5 mil per store).

In the food segment regional expansion with the newly market leading side dishes has increased velocity of sales for customers. By concentrating on the meat section and breakfast day part in frozen foods the focus has moved away from a primary emphasis on sausage to create double digit growth in their food business. Plant expansion and the vertical integration acquisition of Kettle Creations gave both capacity and margin expansion opportunity. New product introductions into the meat cases of more side dishes in expanding regions give them both a proprietary and somewhat protectable market position. Look for more pasta and rice dishes and addition to the breakfast mix in the freezer case(including sausage).

At multiple roundtables we have hosted the fast casual model has been identified with improving penetration and market share. The Bob Evans off premise focus and the home meal replacement are the focus of the new carry out, bakery and catering offerings. This further leverages the real estate of restaurants like few others in the industry can follow. Day parts are almost even at the restaurants giving them unique opportunities with virtually any new menu items. Combined with a fast growing and distinct food product space Bob Evans is a unique paradigm offering in the packaged food/restaurant space.

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • Most of the major Asian stock indices started the week off on a positive note led by a gain in China.
  • Data from HSBC showed China’s service economy growth held steady in July from June.

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  • This was taken as a positive since China’s service sector growth has been showing signs of deceleration, but maybe they have finally stabilized?
  • China’s government also issued a separate report on its service economy, and surprise, surprise, it claimed service sector growth actually accelerated in July from June.
  • Not all markets in Asia started the week off positively though, red-hot Japan saw its benchmark index, the Nikkei, drop 1.44%, Korean stocks lost 0.37%, and Russia’s main stock index opened the week 0.41% lower.
  • Stocks opened higher in Europe but are paring some of those gains.
  • Service sector data was also released throughout Europe overnight and like other data we have been collecting across the pond, it showed the overall Euro economy is contracting, but not as bad as feared.
  • Through Friday’s close, the S&P 500 index is now up over 21% on a total return basis year-to-date.
  • Small and mid-cap U.S. stock indices are doing even better.
  • All the while, as you will see at the end of this report, 2013, 2014, and 2015 S&P 500 earnings estimates continue to fall on an absolute basis.
  • This has many strategists and pundits puzzled. In doubt, they say earnings do not matter and stocks are only rising because of the Fed.
  • Those who say earnings do not matter cannot be more wrong.
  • The key to the markets rise has been the positive delta to those earnings expectations, which we measure better than anyone else.
  • In fact, we are the only ones measuring deltas to earnings expectations across the entire economy.

Into the Weeds: 3Q 2013 Guidance Update

  • We are now to the point we view 2Q 2013 earnings season as almost over with 79% of the companies in the S&P 500 reported.
  • We have shown how both 2Q 2013 earnings and sales growth rates have re-accelerated, albeit slowly, from the 1Q 2013 period.
  • This has been an unexpected positive surprise.
  • Another positive surprise?
  • A majority of companies (67%) beat 2Q 2013 earnings estimates, and a majority of those companies would have still beaten their estimates from 90 days ago.
  • So, lowered estimates were not needed as much this quarter.
  • While 2Q 2013 scorecards are nice to look at, the 3Q 2013 guidance is far more important.
  • How does it look? Well, on the surface, 3Q 2013 guidance looks bad. That is if you were only looking at this period alone.
  • Please do not look at the 3Q 2013 guidance table in this way (i.e. as a snapshot.)
  • We want to change the way you view earnings and the market. That way you will see the improvement in trends that the market is also picking up on.
  • Focus on where guidance has been in the past –more companies were cutting estimates and by a larger in prior quarters.
  • And most importantly, pay attention to the fact 2H13 estimates are not being cut significantly (many felt they were way too high), this indicates that the probabilities of a re-acceleration of growth has grown more likely.

3Q 2013 EPS Guidance Scorecard, as of August 2, 2013

Sector

*Average 3Q13 Guidance

Raise

Maintain

Lower

Reported

% Reported

Utilities

-0.39%

35%

26%

39%

23

74%

Telecommunication Services

-1.25%

0%

33%

67%

3

50%

Industrials

-1.48%

22%

15%

64%

55

89%

Consumer Discretionary

-1.68%

29%

10%

61%

52

63%

Financials

-2.05%

40%

38%

22%

73

90%

Energy

-2.46%

30%

11%

59%

37

86%

Health Care

-2.74%

18%

20%

62%

45

83%

Information Technology

-2.78%

28%

17%

55%

53

76%

Consumer Staples

-3.57%

8%

28%

64%

25

63%

Materials

-5.92%

11%

11%

79%

28

93%

S&P 500

-2.36%

26%

20%

54%

394

79%

Source: The Earnings Scout
*3Q13 EPS estimate change after 2Q 2013 earnings release

How does current guidance companies are providing compare to prior quarters?

Period

Average Guidance

Raise

Maintain

Lower

3Q 2013

-2.36%

26%

20%

54%

+2Q 2013

-2.45%

23%

24%

53%

*1Q 2013

-2.76%

26%

17%

57%

*4Q 2012

-3.04%

25%

17%

58%

*3Q 2012

-3.50%

22%

14%

63%

Source: The Earnings Scout
+2Q13 guidance during 1Q13 earnings season
*Prior periods only include the results of the 394 companies that have reported 2Q13 earnings

Estimates continue to fall after companies report earnings, but at a lesser rate

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Earnings reports this week – by sector

  • 57 more companies in the S&P 500 will report earnings is week
  • Companies in every sector will be represented with the most earnings reports coming from the consumer discretionary, financials and utilities sectors this week.
  • By weeks end, over 90% of the S&P 500 will have reported 2Q13 results.

Updated earnings expectations and PE trends

Updated Actual and Estimated S&P 500 Quarterly EPS Growth

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Consensus S&P 500 EPS Estimates

Fiscal Year

Current EPS

1 Week Ago

1 Month Ago

3 Months Ago

6 Months Ago

2013

$109.08

$109.25

$109.72

$110.87

$112.42

2014

$120.65

$120.92

$121.62

$122.43

$124.43

2015

$130.89

$131.08

$132.18

$133.88

$140.22

Price to Earnings Ratios

Fiscal Year

Current P/E

1 Week Ago

1 Month Ago

3 Months Ago

6 Months Ago

2013

15.67

15.48

14.87

14.73

13.46

2014

14.17

13.99

13.42

13.34

12.16

2015

13.06

12.91

12.35

12.20

10.79

Source: The Earnings Scout
Data as of market close on August 2, 2013

Back-to-school is the second most important shipping season each year but it will be more important than ever for struggling retailer JC Penney especially after the recent rumor that the company was facing serious credit issues. One potential indicator that Penney is getting its business turned around comes from new research by Experian Marketing Services that shows the chain’s website as second only to Walmart’s for back-to-school shoppers. Last year, Penney didn’t even crack the top 10. The chain is touting its new Joe Fresh line for kids and emphasizing discounts on popular own-brands such as Arizona jeans and shirts. Dick Seesel isn’t sold on JCP’s expectations this back-to-school season stating, “I’m skeptical about the Experian data and would like to see other studies backing it up. Just to cite one example, it’s hard to see why Target—a much bigger company with a more robust business in BTS categories—would be surpassed by JCPenney in its recovery mode. The JCP turnaround story (and stock price) was unfortunately clouded yesterday by apparently incorrect reporting about credit issues. (Inaccurate reporting and the New York Post…enough said.) There is evidence that JCP traffic counts and comp sales are starting to improve against terrible 2012 comparisons, but there is also evidence in the stores that the company has a long way to go. Outside of a few pockets of merchandise strength, such as school uniforms, there is not enough conviction in areas like dorm room supplies, even in much-touted areas like the new Home Store.” To read the full article please visit http://www.retailwire.com/blog-post/e9b22de4-02f5-4e89-87d2-579d45f478c6/does-back-to-school-represent-a-turnaround-for-penney.

 
Dick Seesel is the Manager and owner of Retailing In Focus, LLC. He was most recently a Senior Vice President and Divisional Merchandise Manager at Kohl’s Department Stores. Dick is proud to have helped Kohl’s grow from 18 stores to a national retail powerhouse, during an era of change and consolidation throughout the retail industry. During his 24 years at Kohl’s, Dick managed the Women’s Accessory, Jewelry, Cosmetics and Intimate Apparel businesses. Prior to Kohl’s, Dick worked for Dayton’s Department Stores (Minneapolis, MN) and his family’s retail business. Dick will be participating in our Retail Roundtable in New York on August 15th at 2 PM ET and if you would like to attend or dial-in to the event please contact info@roulstonresearch.com.

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • The auto parts & equipment industry in the S&P 500 consists of three companies: BorgWarner, Delphi and Johnson Controls.
  • The industry accounts for 0.11% of the S&P 500 index.
  • In 2012, the auto parts & equipment industry significantly underperformed the consumer discretionary sector (4.45% vs. 23.92%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is now outperforming the consumer discretionary sector (35.12% vs. 26.04%) and the S&P 500, which has a total YTD return of 19.62%.

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  • As we have sifted through all of the earnings reports over the past several quarters, we have noticed the positive trends within housing begin to wane, while anything tied to the auto industry has started to accelerate into more positive territory.
  • Based on the 2Q13 earnings reports and 3Q13 guidance, there is a great chance these positive trends will be sustained through the first half of 2014.

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