McKinsey & Company Goes to Corporate ‘Insiders’ for View of Future

Thursday, April 22, 2010

Many investors question whether forecast earnings are a worthwhile measure of stock market valuation. Doubts surrounding anticipated earnings include ignored economic problems and Wall Street analyst optimism.

McKinsey & Company has just provided another approach to getting a measure of where the economy and corporations are headed – a survey of ‘insider’ information.

McKinsey & Company, a leading, global management consulting firm, has released a survey of company executives (the ‘insiders’). The information provides a view of current and future economic developments along with company activities and results.

You can access this presentation, “What executives think about the economy: 2004 to now” (April 2010), at McKinsey Quarterly, their newsletter site. (Free registration is required to access it and many of their other writings.)

Here are some key findings, from executives of companies headquartered in North America.

  • Two-thirds (68%) feel North American economic conditions are moderately or substantially better than six months ago
  • The same percentage believe North American economic conditions will be moderately or substantially better six months from now
  • Two-thirds (65%) expect demand for their products (unit sales) will increase in the next six months
  • Three-quarters (78%) believe their company’s earnings will increase in the same period
  • One-third (33%) anticipate hiring new workers, with 52% staying the same and 14% reducing the workforce
  • Of the 36% who sought financing recently, 54% got the full amount and 30% got some

These responses confirm the economic indicator improvements we have been seeing or are expected (such as hiring and borrowing/lending). And they provide support for the positive sales and earnings growth forecasts.

So… Projected economic improvements and company sales/earnings growth look appropriate, not overly optimistic. This means we can use the earnings forecasts to judge stock market valuations.

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April 2010