Goldman Sachs : SUSTAIN-Long Term Winners-Near term Value

Long-term winners, near-term value July 2013: Growth & resilience
Growth on the agenda for H2 2013
Looking ahead through the remainder of 2013 and
into 2014, our expectations are for further
stabilization and growth expansion. The GLI
continues in positive territory, with the advanced
July GLI +2.7% yoy. Should positive macro data
continue, QE tapering and rising rates are likely to
follow – a positive for quality companies as we
analysed last month (GS SUSTAIN: Long-term
winners, near-term value; June 25, 2013).
As we cycle into earnings, resilience is key
With the onset of quarterly earnings we probe the
continued earnings resilience of high quality
companies: year to date one year fwd consensus
EBITDA estimates for stocks on the GS SUSTAIN
Focus List have been revised upwards by 190 bp.
In contrast the lower quality stocks (fourth quartile
returns and positioning) have seen estimates fall
140 bp, with the Datastream market down 70 bp.
GS SUSTAIN Focus List stocks also have a track
record of beating at quarterly earnings – since
mid-2007 they have beaten 48% of the time vs.
44% for the S&P and 41% for the STOXX 600.
The premium for quality continues to fade
Continued earnings resilience is key as the
premium for stocks on the GS SUSTAIN Focus List
continues to contract. Year to date, the average
EV/EBITDA premium for the list has fallen 5 pp vs.
global peers. Currently, the premium is 23.4%,
210 bp below the historical average. The premium
for stocks that generate 2x the market cash
returns, are forecast to generate faster top-line
and earnings growth and have substantially
stronger balance sheets than the market, has not
been this low since October 2010.
10 quality stocks flagged by value screens
In re-running our valuation overlays for stocks on
the GS SUSTAIN Focus List, we identify 10 stocks
that are flagged by one or more of our value
screens.
Stocks highlighted on absolute and/or relative
value are: Fortum, Qualcomm, BBVA, Belle, Itau
Unibanco, Lojas Renner, Roche and Shire. Stocks
that have de-rated recently (with consensus
earnings upgrades, but sector-relative
underperformance) are: Novo Nordisk and TSMC

��

-->
Overview: Earnings resilient yet premium fade
Alongside our regular monthly valuation overlays for stocks on the GS SUSTAIN Focus List, we probe the earnings
resilience of high quality companies in light of the fading premium for quality stocks that we have seen year to date: while
the multiple premium for quality is down, their superior earnings growth remains a sustained source of alpha in our view.
Quality companies continue to show resilient earnings growth, despite a further fade in premium
Against the backdrop of a continuing fade in the premium afforded to high quality stocks, we have retested the superior earnings
growth of the high quality companies on the GS SUSTAIN Focus List. As we articulated in GS SUSTAIN: A renewal of vows, April
2013, the ultimate source of outperformance for these companies is sustained and superior earnings growth that exceeds consensus
earnings expectations.
In the year to date the superior earnings growth of quality companies has continued: one year forward consensus EBITDA
estimates for stocks on the GS SUSTAIN Focus List have been revised upwards by 190 bp; in contrast the lower quality stocks that
are bottom quartile on our returns and industry positioning analysis have seen estimates fall by 140 bp, and the Datastream market
has seen earnings revised down by 70 bp.
As we enter quarterly earnings season we will also be looking for a continuation of the trend we have seen through previous
earnings seasons of higher quality companies beating expectations more and missing expectations less than broader
indices. On average in each quarterly earnings season since we formed the GS SUSTAIN Focus List in June 2007 stocks on the GS
SUSTAIN Focus List have beaten consensus earnings expectations 48% of the time and missed 14% of the time. This compares with
the S&P500 averages of 44% beats and 13% misses, and the STOXX 600 averaging 41% beats and 35% misses.
If superior earnings growth remains resilient, it provides a buffer to the continued multiple de-rating we are witnessing for
the stocks on the GS SUSTAIN Focus List. This is evident globally, where the average EV/EBITDA premium of the GS SUSTAIN
Focus List has contracted by 5 pp since the start of the year. The premium now stands at 23.4%, 210 bp below its historical average,
and is now at a level we have not seen since October 2010.
In summary, the relative earnings growth of high quality companies remains resilient while the relative multiple investors are
paying for high quality companies is now below long-run averages, providing a strong backdrop for investing in companies that are
forecast to generate nearly double the cash returns of GS’ global coverage (20% CROCI, vs. 11% for our coverage), and faster sales,
EBITDA and debt adjusted cash flow growth, while retaining superior balance sheet strength for further investment.
10 long-term industry leaders currently flagged by our three value screens
Ten stocks are currently flagged by one or more of the valuation overlays we apply to stocks on the GS SUSTAIN Focus List to
highlight compelling entry points to long-term industry leaders. Stocks highlighted on absolute and/or relative value are: Fortum,
Qualcomm, BBVA, Belle, Itau Unibanco, Lojas Renner, Roche and Shire. Stocks that have de-rated recently (with consensus
earnings upgrades, but sector-relative underperformance) are: Novo Nordisk and TSMC