IR Monitor – 24th August 2022

This week’s news

Why are CEOs suddenly obsessed with ‘elasticity?’

Executives are rightly preoccupied with inflation – and conversations on the topic have taken a particular turn to focus on elasticity, reports the New York Times. Despite the fastest inflation in decades, consumer spending has held up relatively well so far – although there are warning signs that this may not last, which is where elasticity comes in. If a small rise in price leads to a big fall in demand, the item is said to be more elastic. But if a big rise in price has little effect on demand, the product is considered inelastic — and a good thing for companies’ profit margins because they can raise prices without risking a drop in sales. As companies raise prices to cover their own rising costs, they are making bets on elasticity. Fittingly, the number of mentions of elasticity on earnings calls mimics the inflation rate: bumbling along at a relatively low level of about 2% for years before soaring to new heights in recent months and above 9% in June. The growing chatter about elasticity suggests that the point at which higher prices could force broader consumer cutbacks is approaching.

Late reporting? 

A newly launched index, tracking off-trend earnings announcements from US firms, shows that more companies delayed their earnings in Q2 2022 than at the start of the Covid-19 pandemic according to IR Magazine. The Late Earnings Report Index (Leri) tracks how many earnings date confirmations are later or earlier than their historical norm. A reading over 100 demonstrates more companies are delaying reports – signaling that investors should keep a more careful eye on the market. In Q2 2022, the score clocked in at 144. In comparison, the reading for Q1 2020 was 133. This might suggest that US companies are exhibiting signs of uncertainty regarding growth expectations.

Anti-ESG measures fail to get traction 

The fight over ESG continues in corporate America. Whilst several high-profile politicians have condemned the approach (including potential 2024 presidential candidates Mike Pence and Ron DeSantis), ESG’s opponents are making little headway in the boardroom, according to DealBook. In the first half of the year, there were 43 anti-ESG shareholder proposals tabled, which received on average a meagre 7% support (versus 30% across all proposals). Only a dozen anti-ESG proposals achieved more than 5% support, and those that succeeded focused largely on less partisan issues, like disclosure on lobbying activity.

Record share buybacks at an end? 

Alphaville is preoccupied this week with some Bank of America research, specifically onthe record-setting drop in the amount of cash held by companies with investment-grade ratings, excluding financials and utilities, whose cash levels are contingent on regulatory requirements. BoA found that the dwindling amount of cash and liquid securities held by corporate borrowers has accelerated from the 15% drop in Q1, to 20% in Q2 which is the quickest pace on record since 1998. Cash levels also fell on a sequential basis, down 4% from the prior quarter, compared with a historical average increase of 2% in Q2. But where is all this cash going? Oxford Economics recently found that a significant proportion of the cash appears to have been used to fund record buybacks.

Why executives should start acting like activist investors

According to the Harvard Business Review, companies need to adopt “capital responsiveness” to face the headwinds posed by an impending earnings recession, disruptive competitors, and fundamental shifts in customer and consumer behavior. Only 38% of companies consistently achieve any one of the above components of capital responsiveness, and only 17% consistently achieve all three. Capital activism improves capital responsiveness. There are three specific strategies under capital activism which can be followed by leaders; focus on differentiators, create nimble investment allocation practices and force trade-offs in operating resources. Ultimately, capital responsiveness is essential to staying competitive in a disruption-filled world.

And finally… the parallels between fiddler crabs and activist investors 

The Financial Times’ Lex column draws on crab imagery this week to explain market trends: walk past a colony of fiddler crabs and they all dive into their burrows; stand still and they emerge again. The threat you represent to them has normalised. The intention here is to shed light on the summer rally of stocks after the slump of the prior months. One indicator is a flurry from activist hedge funds. Recent examples include ValueAct making noise at the New York Times Company, Dan Loeb’s Third Point at Disney and Yoshiaki Murakami at Jafco, Japan’s biggest venture capital group.

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