AKAnomics Economic Update: 26Q2

As we focus our attention on 26Q2, AKAnomics assessment of global macro & industry data suggests

1. Steady revenue growth with slight improvement in organic revenue growth counterbalanced with lower FX and M&A.

2. A high degree of consensus revenue disconnects (45% of the names we track), making it a particularly important quarter to look for revenue beats & misses, and for stock picking

3. Revenue surprise estimates are balanced between beat estimates and miss estimates. This is in significant contrast to Q1 where we had estimated an overwhelmingly more set of beats than misses, which turned out to show a 77% hit rate.

4. The revenue beats are more concentrated in Electrical Eqp, Packaging, and Machinery. The revenue misses are more concentrated in Chemicals, Transportation, and Construction Materials names.

5. Global industrials growth is steady, which some improvement in North America, counterbalanced with softness in Europe and Asia. Pricing has become a big driver, and contributing to price-sensitive sectors (e.g., Chemicals, Transportation), but not the only driver for consensus disconnects.

6. At the sub-sector level, we see the following:

   1. Positive growth change, above consensus

      1. Specialty Retail organic growth is improving from stable consumer activity overall with a few end markets such as  North American furniture retailers showing positive growth inflections. 

   2. Flattish growth change, above consensus

      1. Electrical Equipment volumes and component volumes in North America have stayed stable relative to last quarter. The positive surprise is due to worsening consensus expectations which have not yet materialized in the macroeconomic data.

   3. Positive growth change, below consensus

      1. Transportation is accelerating as a result of increased pass through diesel costs and freight trucking rates, in spite of flat volume growth change, however, consensus is expecting higher growth than what we observe in the data.

      2. Chemical is exhibiting positive organic growth driven by commodity cost pass-throughs and higher chemicals and resins output pricing in North America. However, total revenue growth remains below consensus expectations.

   4. Negative growth change, still above consensus

      1. In Machinery, inspite of stable construction and improving HVAC volumes, North American construction and agricultural machinery volumes are worsening leading to slowing organic growth. This slowdown still leads to a positive revenue surprise for the sector overall. 

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