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Remember: “Fake It ‘Til You Make It” Doesn’t Work For Sales

The great thing about the bottom line is that you can “fake it ’til you make it” – so to speak.

Actually, you can fake it even if you don’t make it. That’s the beauty of the Fed-inspired hunt for yield.

Investors are so damn desperate for any semblance of return that they’ll snap up new corporate supply with the same ferocity that a misguided Trump supporter consumes the latest headline from Breitbart News.

The proceeds from new corporate debt sales are of course funneled into buybacks and when you decrease the number of outstanding shares, you thereby boost EPS and thereby share prices, and thereby equity-linked compensation for management. See, everyone’s a winner!

Well, except for the balance sheet, which is why when you look out across IG and HY, you see record leverage.

Anyway, what you can’t fake is topline growth. You know, sales. 

With that in mind, consider the following out this afternoon from SocGen.

Via SocGen

With equity valuations elevated and bond yields rising, it is up to profits to make all the running, or more accurately sales. Typically during an economic upswing PE multiples contract as interest rates move higher; nonetheless equities continue to move higher courtesy of EPS growth generated through greater demand. The problem is then demand. Sales growth is now materially lower than in previous cycles, when typically 10.0% sales growth was the norm as opposed to today’s anaemic 3.5%. For EPS to grow as profit margins come under pressure from higher wages and input costs, investors are going to have to hope for higher sales growth.

sales

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1 comment on “Remember: “Fake It ‘Til You Make It” Doesn’t Work For Sales

  1. Curt Tyner

    Customers with enough $$ to create sales are drying up WHY? 1/ wages are flat and have been for 10-30 years (depends on who you ask) 2/credit (sooner or later you have to pay it) 3/ debt (what happen when you can’t service your debt, as in pay the interest?) does any of this sound familiar? Of course I’m talking mostly about about regular people, you know many of which voted for the Orange julius. Don’t worry, just stick with the central banks as they print us all into oblivion. No bloated companies here. Trick or treat folks. $20,000,000,000,000 NO PROBLEM. We’ll have a check in the mail, how about, never.

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