November 26, 2013 CFO Confidence Remains Strong Despite Weakened Forecasts

Volume 16 | Issue 10

The Chief Financial Officers of North America’s largest and most influential companies - especially those in the manufacturing sector - are

The good news is that optimism among Chief Financial Officers (CFOs) nationwide regarding their organizations’ prospects remains unusually strong for the third consecutive quarter, a recent survey suggests.

You can thank rising confidence in the North American economies for that.

But that optimism is in sharp contrast to underlying earnings, sales, capital spending and hiring forecasts that have fallen significantly, partly because of concerns over policy gridlock in Washington and the current state of the Chinese and European economies, according to Deloitte’s third-quarter CFO Signals survey.

The quarterly survey, which tracks the thinking and actions of more than 120 CFOs representing North American organizations with collective annual revenues of approximately $1 trillion, recorded a third consecutive quarter of positive net optimism among CFOs.

Overall, 42 percent of CFOs expressed improved optimism about their organizations’ prospects versus 24 percent who expressed declining optimism. And while net optimism has declined from the second quarter, this represents the first time in the survey’s history, dating back to the second quarter of 2010, that the measure has been positive for the first three quarters of a calendar year.

“On the optimism side, this is an interesting quarter because we’ve now been doing this survey long enough to spot some real calendar year cyclicality in that way that CFO’s expressed their sentiment,” says Greg Dickinson, director, North American CFO Signals Survey, Deloitte LLP.

“Typically we get very strong optimism in the first quarter of the year. Then we see it either in the second or third quarter really fall off, sometimes even go negative within the second or third quarter,” Dickinson tells Leo Rommel of Industry Today. “Then it kind of comes back up as they roll toward the end of the year. But we haven’t really dipped yet. We’re still seeing that overall the sentiment is reasonably good.”

MANUFACTURING’S ROLE
Manufacturing and service industries, in particular, continue to forecast higher earnings versus sales, according to the analysis.

CFOs from both manufacturing and service sectors continued to forecast earnings growth significantly above sales growth, in contrast to the tightening of this gap in other sectors.

“If you look at how we asked the questions, there were more CFOs in manufacturing who were more optimistic,” Dickinson says. “There were also more CFOs who were less optimistic. There were fewer in the middle than there tend to be. It probably depends a bit on exactly where you are in the sector, but overall, I think manufacturing CFOs came out little bit more optimistic than the average CFO.”

DECLINING EXPECTATIONS
This confidence continues despite weakened company forecasts from CFOs across all industries, the survey says.

Earnings growth expectations matched their survey low, having fallen from a mean of 10.3 percent last quarter to 8.0 percent in the third quarter.

Likewise, sales growth expectations have fallen from 5.7 percent in the second quarter to 5.0 percent, marking the lowest forecast in the past 12 months, according to the survey.

Those tempered forecasts also affected investment, with capital spending growth expectations falling to 4.9 percent from 7.5 percent in the second quarter. Likewise, domestic hiring forecasts also fell to 1.3 percent from 2.4 percent over the same time frame.

“I think a couple of things to keep in mind are that the year projections aren’t great relative to the last two or three years, but they’re still greater than zero, which you kind of have to keep in perspective, too,” Dickinson says. “They’re still saying that the key measures – like year-over-year sales, earnings, capital expenditures and domestic staffing – are still expected to be higher. They just don’t expect them to be much higher as they expected a couple of strong quarters ago. It’s still positive. It’s just not as positive as we probably would like to see.”

Sanford Cockrell III, national managing partner, CFO Program, Deloitte LLP, said in a statement that the decline in underlying fundamentals paints a picture of organizations turning their focus back towards planning and a reassessment of their core business strengths.

“Organizations are recognizing that, in a ‘fits and starts’ recovery, even slow growth requires a mix of adaptation and persistence,” Cockrell says.

NORTH AMERICA STILL GOOD
The driving force behind CFOs’ optimism and growth plans appears to be the comparative strength of the North American economies, Dickinson says.

About 38 percent of the survey’s respondents rate their current status as “good,” an increase from 30 percent last quarter. Meanwhile, 55 percent believe the North American economies will be better a year from now.

“Every quarter we ask this question, about what are the best aids to your growth as you look forward and what are the biggest impediments?” Dickinson says. “The North American economies are still throttling everything else by a long shot. That continued this quarter. If you had to find a silver lining, it’s still North America.”

He adds, “But what we’re always wondering is, well, is North America a silver lining or just a relative silver lining?”

Dickinson suggests this because CFOs are increasingly concerned about China, with only 26 percent regarding China’s economy as “good.” That’s down from 35 percent last quarter. And only 27 percent expect China’s economy to improve in the upcoming year, down about 10 percent from last quarter’s findings.

CFO’s perception of Europe is similarly gloomy. About 81 percent of CFOs rate the region’s economy as “bad.” However negative, that rating is actually an improvement from last quarter’s 90 percent, as is the 30 percent who believe conditions may worsen a year from now, an improvement from last quarter’s 40 percent.

GROWTH STRATEGIES
In light of this mixed outlook, CFOs are evenly split on how to pursue growth. Roughly 51 percent confirmed that their organizations plan to pursue substantial mergers and acquisitions with the most common reason being the desire to pursue twin tracks of organic and inorganic growth.

The 49 percent not planning deals most commonly cite better organic growth opportunities and a shortage of good values in the M&A marketplace.

“Many organizations are taking a step back to reconsider how their economies and industries are evolving,” Dickinson says. “Large recent deals show that M&A can be a tool for growth and also for changing strategic direction.”

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