NEW YORK (TheStreet) -- Proprietary research from Societe Generale's Andrew Lapthorne has been making waves on the Street recently with its suggestion that U.S. 2013 profit growth may have been heavily overstated.
Alternative profit measures paint a very different picture.
While corporations' as-reported 2013 net income growth was strong, by several other measures profits were decidedly tepid:
Growth in earnings before interest and taxes (EBIT), in particular, has been near zero for more than a year:
While operating profits measured using MSCI's index methodology are actually in decline:
"The source of this [apparent] growth," Lapthorne says, "is not a robust improvement in operating cash flow but to be found in the large goodwill write-downs of 2012." The as-reported 2013 profit growth was an accounting artifact resulting from one-time 2012 writeoffs.
Lapthorne adds, "Even these MSCI figures have been flattered by a reduction in the share count." Corporations have been loading up on debt, with much or all of the funds being used for dividend distributions and valuation-enhancing share buybacks:
In summary, Lapthorne says 2013 "was a year of weakening cash flow growth, lower profit growth, deteriorating earnings quality, and corporates piling on the debt."
The takeaway: Current market valuations may well be pegged to false beliefs about 1. trailing as-reported profits, 2. comparison to artificially weakened 2012 profits and 3. buyback-driven share valuation growth.
While an imminent recession does not appear to be in the cards, the decline in household assets and net worth that always precedes a recession may well be. Look out below.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.