Each quarter seems to have a rhythm to it in the investment management business – at least from where we sit. As a quarter winds down and comes to an end, we spend a fair amount of our time communicating those results to our clients and investors in writing, over the phone and face to face. After this flurry of activity, earnings season quickly rushes into high gear. During this period of time, we not only monitor continued economic releases, but we also read the earnings call transcripts for our common stock holdings, others that we may be considering for purchase or have proven to be decent barometers of the economy’s overall health.
Earnings calls are important to us for a few reasons. First, after listening to the same calls over a period of quarters and years, we get to know the nuances of different management teams, particularly how they tend to view the world and how they communicate those views. This is important as it sets a benchmark for each management team’s unique pattern of behavior. Second, the earnings results often provide the opportunity to see where the rubber meets the road. In other words, most economic releases on the state of the economy have an air of academics about them, while company commentaries help provide real color and can at different times both confirm and deny the existing macroeconomic evidence.
So, the river of earnings is upon us. While we won’t post the third installment of The Flop, The Turn and the River just yet, I thought I would share some insights from Google’s earnings commentary. Google enjoyed a good quarter, all things considered, but hasn’t been immune to the decline in worldwide economies. Over the last few quarters, this company has been able to cut alot more from expenses than many companies, improving their margins considerably. The good news is that as the economy turns, Google’s margins will likely move up even further as the company has become more lean and mean after enjoying a great many “fat” years. Does Google see a recovery today? No, not yet, but they do believe one will occur.
The following quotes from management on the call were of particular interest.
“What’s interesting from my perspective is to see how graphically search engines shed light on the state of the economy. Searches on foreclosures are up 42% year over year, bankruptcy is up 53% year over year and unemployment has more than doubled. We also have seen increases in education, self help, spirituality, and on the other side of the stress release spectrum, alcohol and gambling. We are also seeing strong search results in U.S. health care, automotive and auto maintenance and auto parts, which may be a do it yourself phenomena.”
I think it is safe to say that you can see what areas of the economy are doing well by following the topics folks are currently googling the most. I’ll also wager a bet that companies that benefit from bankruptcy, foreclosures, education, and do it yourself auto repair have enjoyed stronger relative stock price performance over the past twelve months. What isn’t clear to me is how quickly these trends can shift and whether or not they are leading, coincident or lagging indicators. I think Google, if it wanted, could enter a whole new business providing this grass roots, real time data to Wall Street. Maybe someone does already.
Pretty soon, earnings season will be over and then another quarter will draw to a close and the process will repeat itself once more. As bad as things may feel, the path to recovery is always paved one quarter at a time.
Today’s Pepper and Salt. Economics, ergonomics…it’s all the same.