Normanack/FlikrA young, tough opossum, ready to take on the world.Corporate profit margins are at all-time highs. Because earnings are extremely sensitive to small moves in this metric, investors and analysts alike will be eyeing this closely throughout earnings season.
It’s interesting to note that companies and their investor relations departments are actually much more conservative about profit margins than Wall Street.
“Company managers are lowering estimates at a frantic pace,” said UBS’s Art Cashin in a note this morning. “Wall Street sceptics, thinking the managers are playing possum, are holding to higher estimates.”
“The prospect that margins may have peaked was a consistent theme that emerged during the 4Q 2012 earning conference calls,” says Goldman Sachs’ David Kostin. “We expect the trend will continue in management commentary this season as well.”
While it may be intuitive to think that margins will revert to the mean, analysts are actually split on margin sustainability.
But like Cashin said, Wall Street’s stock pickers think margins are heading higher.
“The real question is can managers expand margins that are already at record levels?” asks Cashin. “Is there more blood in that stone? We’ve seen earnings are key to stock prices. That’s why this earnings season may be critical.”
Here’s a chart from Goldman’s Kostin showing the divergence between Wall Street strategists’ (i.e. top-down) and stock pickers’ (i.e. bottom-up) expectations.