December 19, 2016

After U.S. Inauguration, Which Industries May Prosper – or Not?

by Tim Gaumer

It’s now been one month since the U.S. presidential election. As some voters had feared and others had hoped, it appears the new administration will have few things in common with the old. In an attempt to partially answer the question in our headline, we turned to a collection of experts who know their companies well – sell-side analysts.

Analysts have been busily revising their earnings models over the past month. Using the Eikon Aggregates App, we can aggregate their collective views by industry to see which have experienced the most upward revisions in their financial projections and which have seen the most downgrades.

As a comprehensive measure of the change in analyst sentiment, we’re using the Thomson Reuters StarMine Analyst Revisions Model (ARM) – more about this later. The numbers associated with each of the Thomson Reuters Business Classification Industry Groups below are 1-100 relative percentile ranks across North America.

Possible winners

High scores represent upward revisions and are considered a bullish signal. Low scores represent the opposite. As a view into the changes in market sentiment, we’re displaying the 4-week price change in the adjacent column. Here are the industry groups with the most positive revisions.

Exhibit 1. StarMine ARM Positive Revisions 

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Source: Thomson Reuters Eikon/StarMine

Left behind?

Now for the list of those who may lose out under the new administration:

Exhibit 2. StarMine ARM Negative Revisions

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Source: Thomson Reuters Eikon/StarMine

Factors in play

Of course, there are probably reasons beyond just the election that may be causing analysts to revise their outlooks. And, be careful with those industries that have very few companies in the aggregate (e.g. uranium and office equipment in the list above). Still, it’s interesting to note some of the contrasts here that may indeed be tied to the election outcome.

For example, the coal industry tops the list of positive revisions. Contrast that with the combined revisions for the 28 companies that make up the renewable energy sector, in sixth position among the largest downward revisions. Does this mean that dirty energy is back and clean is out? That’s not inconceivable, given news that U.S. President-elect Trump will nominate climate change skeptic Scott Pruitt, State Attorney General of Oklahoma, as head of the Environmental Protection Administration.

While that may be icing on the cake for coal producers, the earnings outlook has probably also been favorably influenced by the recent rising price of coal. Below, we’re showing the price of coal at the mine (“free on board,”or “FOB”) across various markets over the last five years. Perhaps this is the chart that election forecasters should have been watching – prices began to skyrocket in September.

Exhibit 3. Coal Prices

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Source: Thomson Reuters Eikon, McCloskey World Coal FOB Historicals

Checking the scorecard

The source of our list of companies with positive and negative revisions aggregates the ARM scores on the individual companies that are constituents of each industry. Here’s a look at CNX Coal Resources LP (CNXC.N). There are three sections to the ARM view in Eikon. Here, we see on a 1-100 scale, CNX Coal is in the top percentile, with the highest possible score on our scale.

Exhibit 4. StarMine ARM Score – CNX Coal Resources

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Source: Thomson Reuters Eikon/StarMine

Recent rise

That high score hasn’t been the case for long. Looking at the model history, it ranked among the lowest percentiles as recently as April and traded around $7 per share. Today, it’s trading above $17.

Exhibit 5: StarMine ARM Model History – CNX Coal Resources

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Source: Thomson Reuters Eikon/StarMine

Broader view

The ARM model takes a more comprehensive view of analyst revisions than the typical measure that just looks at the change in the EPS consensus for the current quarter over the last 30 days. ARM reflects revisions for the current quarter, full year and next year. And it extends beyond EPS to revisions in EBITDA and revenue.

It also incorporates recommendation changes and the proprietary Predicted Surprise measure. The Predicted Surprise is the percentage difference between the consensus and the StarMine SmartEstimate®, which reweights the consensus to place more weight on the more recent estimates from the most accurate analysts. It is predictive of the direction of future revisions and a reinforcing signal when in the same direction as the change in consensus.

Here, you can see strong across the board upward revisions in financial forecasts:

Exhibit 6. StarMine Analyst Upward Revisions

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Source: Thomson Reuters Eikon/StarMine

In contrast, we have CROCS Inc., (CROX.OQ) a company in one of the lower ranking industry groups, textiles and apparel. CROCS has an ARM score of 3. Negative revisions can be seen in red below.

Exhibit 7. StarMine Negative Revisions – CROCS Inc.

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Source: Thomson Reuters Eikon/StarMine

The import factor

While this may be driven by company-specific factors, the incoming administration’s call for imposing taxes on imports would, if enacted, hit this industry especially hard. Few of their materials are still made in the U.S.

Textile & apparel has, as a percentage of sales, the highest net import content of any U.S. industry. As reported in the December 12 issue of the U.S. edition of the Financial Times newspaper, “the National Retail Federation said the import tax could inflate the tax bill of some fashion chains to three to five times their pretax profits, jeopardizing their solvency.”

With major changes in energy and tax policies — just two of possibly many external factors impacting the profits of U.S. companies over the next four years — we expect the sell-side will be kept busy. For investors, it may pay to keep a close watch on industry level revisions activity.


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