Deutsche Bank AG
The Relevance of Annual Reports
for Analysts in Recession Times
September 2009
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters,
Bloomberg
g and other vendors. Data is sourced from Deutsche Bank and subject
j
companies.
p
Deutsche Bank does and seeks to do business with companies
p
covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
D A
Dr.
Andreas
d
N
Neubauer
b
Head of Research Germany / Austria
Andreas.Neubauer@db.com -(49) 69 910 31900
Introduction – Earnings Guidance in Recession Times
Earnings Guidance
Gl b l recession
Global
i
in
i 2009E but
b t recovery in
i 2010E
G7 GDP growth
GDP growth, CPI inflation (in %) by region
8
6
% qoq ann.
G7 GDP growth
4
2
0
-2 99
00
01
02 03
04
05
06
07
-4
-6
-8
-10
08 09
US
Japan
Euroland
Germany
Asia
(ex Japan)
China
EMEA
Russia
Latam
Brasil
G7
EM countries
Global
G DP growth, %
2008 2009F 2010F
1.1
-2.8
1.2
-0.7
-7.0
0.3
0.6
-4.3
0.8
10
1.0
-6
6.0
0
04
0.4
6.8
9.0
4.3
5.6
4.4
5.4
0.6
5.8
2.9
4.2
7.5
-3.3
-4.4
-2.3
-1.0
-3.9
1.4
-1.5
5.8
7.2
2.9
1.8
3.0
4.0
1.0
4.5
2.5
Source: Global Insight, Deutsche Bank Global Markets Research
Source: Deutsche Bank Global Markets Research
Forward data are estimates
Forward data are estimates
Dr. Andreas Neubauer · September 2009 · page 3
CPI inflation, %
2008F 2009F 2010F
3.8
-0.5
0.8
1.4
-0.8
-0.5
3.3
0.3
0.9
28
2.8
03
0.3
08
0.8
6.5
5.9
12.6
13.3
8.8
4.6
3.2
7.8
5.2
1.3
0.0
9.3
11.2
6.3
4.2
-0.1
3.6
1.5
2.9
2.0
8.5
10.3
6.6
4.2
0.8
4.5
2.4
Earnings Guidance
Global
Gl
b l GDP d
decline
li 2009E b
by 1
1.5%
5% ffor 2009E means
earnings should decline by 30-40%
50
7
40
6
5
30
4
20
3
10
2
0
1
-10
0
-20
0
1
-1
Global GDP outlook 2009E suggests earnings to decline by 3040% whereas bottom up estimates are showing only a small
decline
-30
-40
US earnings growth (%) (LHS)
Source: Thomson Financial, IBES, Deutsche Bank
Forward data are Deutsche Bank estimates
Dr. Andreas Neubauer · September 2009 · page 4
European earnings growth (%) (LHS)
World GDP growth (%) (RHS)
-2
-3
Earnings Guidance
E
Earnings
i
guidance
id
widely
id l suspended
d d in
i recession
i
 Ongoing
g g recession,, volatility
y in financial markets has caused an increasing
g
number of public companies to suspend earnings guidance as operations
become increasingly difficult to predict
 Recession has accelerated an existing trend in which many public companies
have moved from annual to quarterly guidance
 H
Hence, analyst
l t expectations,
t ti
earnings
i
uncertainty
t i t start
t t to
t fluctuate
fl t t much
h
more widely
Dr. Andreas Neubauer · September 2009 · page 5
Earnings Guidance
Strong d
St
downgrade
d momentum
t
and
d hi
high
h volatility
l tilit off
macro variables have pushed up earnings uncertainty
25%
Standard deviation as % of earnings
20%
15%
10%
5%
0%
1987
1990
1992
1994
1996
US
1998
2000
2002
2004
2006
2008
Europe
Note: Earnings uncertainty is measured as the standard deviation of the estimates of the individual analysts around the average consensus estimates. For Europe, the
average of the MSCI Europe is used and for the US, all S&P500 companies are taken into account.
Source: I/B/E/S, Deutsche Bank Global Markets Research
Dr. Andreas Neubauer · September 2009 · page 6
Earnings Guidance
E
Earnings
i
growth,
th uncertainty
t i t by
b country
t
2009E and 2010E growth of country earnings (%)
Switzerland: SMI
TOPIX
2010E earnings growth (%)
2009E earnings growth (%)
MSCI Asia ex Japan
S&P 500
16.1
MSCI Asia ex Japan
TOPIX
-40
-30
-20
-10
0
10
20
30
40
Current standard
deviation of 12M fwd.
earnings relative to
earnings
11.1
S&P 500
nm
5-year average
standard deviation of
12M fwd. earnings
relative to earnings
15.9
Switzerland: SMI
-41.0
-50
17.1
Euro Stoxx 50
-37.0
FTSE Italy
17.6
Spain: IBEX 35
-33.1
UK: FTSE 100
17.7
France: CAC 40
-30.0
Spain: IBEX 35
18.4
Stoxx 600
-25.3
France: CAC 40
18 8
18.8
Germany: Dax 30
-25.2
Euro Stoxx
19.1
MSCI Latin America
-20.8
MSCI EMEA
19.5
FTSE Italy
-18.4
18 4
Stoxx 600
19.6
MSCI EMEA
-14.7
Euro Stoxx 50
19.8
Euro Stoxx
-5.9
MSCI Latin America
35.7
UK: FTSE 100
8.2
-5.6
Germany: Dax 30
Earnings uncertainty by country (%)
9.9
0
5
10
15
20
25
Source: Thomson Financial,
Financial IBES and Deutsche Bank estimates
Source: Thomson Financial,
Financial IBES and Deutsche Bank estimates
Forward data are estimates
Forward data are estimates
Dr. Andreas Neubauer · September 2009 · page 7
30
Earnings Guidance
Q2 ‘09 Reporting
R
ti Overview
O
i
 So far, 416 companies
p
of the Stoxx 600 universe have reported
p
their results*
 On the earnings front, 57% of the companies beat their estimates while 42%
missed them
 49% off th
the companies
i exceeded
d d th
their
i revenue expectations,
t ti
while
hil 51%
missed them
 Cost cutting programs adopted by the companies appear to be more
successful than expected and hence contributing to the divergence between
the revenues and earnings beats
 However
However, we believe that sales is a purer reflection of what is going on than
EPS and cannot be engineered as easily
 Looking at the stock performance relative to the performance of the Stoxx
600 index
index, 24 European companies have shown a significant positive
surprise, whereas 16 companies had negatively surprised
(time period of measurement: from 2 days before and 1 day after the reporting day)
* As of 24 August 2009
Dr. Andreas Neubauer · September 2009 · page 8
Earnings Guidance
E
European
EPS and
dR
Revenues vs. C
Consensus E
Estimates
ti t *
 Of the 154 companies
p
DB covers,, for 36 companies
p
our analysts
y
have
improved the outlook, while for 15 companies our analysts have reduced their
outlook.
* 416 companies of the Stoxx 600 universe have reported their results according to Bloomberg. The statistics includes only those DJ STOXX companies where EPS numbers
(both actual and consensus) were available
Dr. Andreas Neubauer · September 2009 · page 9
Earnings Guidance
M i risks
Main
i k we see for
f corporate
t earnings
i
in
i 2009
 Lower sales growth
g
 Margins falling to at least mild recession levels (2002/2003)
 Higher cost of debt, especially for small companies with no access to the
b d market
bond
k t and/or
d/ poor ratings
ti
 Consequently, yield gap between high quality and low quality corporate
bonds has reached unprecedented
p
levels
 Goodwill impairment tests could lead to strong goodwill write-downs
 Risk of pension funding gaps as pension assets may have strongly
suffered
ff d in
i 2008
Dr. Andreas Neubauer · September 2009 · page 10
Key Prerequisites
Key Prerequisites
Wh t do
What
d analysts
l t and
d investors
i
t
expectt from
f
companies?
i ?
 Contemporary
p
yp
publication of statements ((information efficiency)
y)
 Lean and meaningful financial reporting in order to provide investors with
unambiguous information (limiting “creative interpretation”)
 Analysts
A l t and
d iinvestors
t
callll ffor ttransparent,
t credible
dibl and
d reliable
li bl iinformation
f
ti
 Hence, Value Reporting based upon untransparent assumptions to convince
investors of strong
gp
performance is of no relevance
 Furthermore, both analysts and investors demand structured reference work,
therefore a standardization of annual reports (such as US 10K fillings) would

reduce
d
titime exposure tto research
h

enhance comparability among industry and peer groups

limit “creative
creative interpretation”
interpretation of earnings and balance sheet figures
Dr. Andreas Neubauer · September 2009 · page 12
Key Prerequisites
A l t and
Analysts
d investors
i
t
demand
d
d execution
ti off generall norm
 German p
principles
p
of proper
p p accounting
g (§243
(
I HGB)) /
Grundsätze ordnungsmäßiger Buchführung (GoB)

M
Merchants
h
(§238
( 238 I S
S.1
1 HGB ii.c.w. §243
243 I HGB)
HGB):
„Jeder Kaufmann ist verpflichtet, Bücher zu führen und in diesen seine
Handelsgeschäfte
g
und die Lage
g seines Vermögens
g
nach den
Grundsätzen ordnungsmäßiger Buchführung ersichtlich zu machen.“

C
Corporations
ti
(§264 II S
S.1
1 HGB ii.c.w. §243 I HGB)
HGB):
„Der Jahresabschluß der Kapitalgesellschaft hat unter Beachtung der
Grundsätze ordnungsmäßiger Buchführung ein den tatsächlichen
Verhältnissen entsprechendes Bild der Vermögens-, Finanz- und
Ertragslage der Kapitalgesellschaft zu vermitteln.“
Dr. Andreas Neubauer · September 2009 · page 13
Key Prerequisites
H
Hence,
annuall accounts
t are tto satisfy…
ti f
 Profit assessment (p
(primary
y function))

Focus on GoB codified in §252 I S.1 No. 4 HGB:
-
German HGB demands cautious (‚Vorsichtsprinzip‘), revenue related
(‚Realisationsprinzip‘), loss anticipating (‚Imparitätsprinzip‘) and
objective (‚Objektivierungsprinzip‘) determination of earnings
 Documentation and Accountability

Besides providing clear, complete, unambiguous and comprehensible
documentation for third parties, the Annual Report shall comprise the
disclosure of usage of entrusted capital and intermediation of a complete
complete,
reasonable, appropriate insight.
 Information function

protecting the interests of third parties

Analysts focus on appendix (HGB) / management commentary (IFRS)
Dr. Andreas Neubauer · September 2009 · page 14
Earnings revisions among ‘pooled’ markets
Earnings Revisions
Wh t are earnings
What
i
revisions
i i
good
d for
f ?
 Consensus analyst
y estimates are widely
y used to represent
p
market
expectations of earnings
 Efficient market theory states that all the information about the value of a
stock is already priced in
in. Hence
Hence, stock prices should only change due to
unpredictable information.
 In reality, however, markets could be inefficient due to information
asymmetries
t i and
d changes
h
iin earnings
i
expectations
t ti
are highly
hi hl correlated
l t d tto
stock price movements
 In late 2008 and early 2009, many analysts got caught up in the atmosphere
of doom and gloom, and overreacted
 Adverse selection issues arise due to products with heterogeneous quality
((‘pooled’
pooled markets)
information quality can (at least partially) explain the biases in
expected returns (D. Hong and M. Warachka, 2005)
Dr. Andreas Neubauer · September 2009 · page 16
Earnings Revisions
E
Earnings
i
guidance
id
among ‘pooled’
‘
l d’ markets
k t
 Information Asymmetry
y
y due to q
quality
y uncertainty
y about earnings
g g
guidance:
Analyst faces increased earnings uncertainty due to companies’ vague
guidance behavior in recession times
 Dilemma: Analyst weighs up

a| costs associated with information (screening process) against

b|| expected
p
benefit disadvantages
g at imperfect
p
information
 Looming market failure due to adverse selection issues (Akerlof, 1970)

Quality of earnings guidance varies among companies as they are
better informed than analysts
‘Pooled’ markets: Market comprises products with heterogeneous
quality and an uniform price (Spremann, 1990)
 Solution: Market separation through signaling good quality (credible,
honest guidance) at reasonable cost provided that signaling costs exceed
a ‘low
low quality’
quality company
company’s
s willingness to pay for signaling at all
Dr. Andreas Neubauer · September 2009 · page 17
Earnings Revisions
C
Country
t earnings
i
revisions
i i
Revisions of 2009E country earnings (%)
Revisions of 2010E country earnings (%)
MSCI Asia ex Japan
MSCI Asia ex Japan
S&P 500
S&P 500
MSCI EMEA
UK: FTSE 100
TOPIX
TOPIX
MSCI Latin America
MSCI EMEA
Switzerland: SMI
Switzerland: SMI
Euro Stoxx 50
MSCI Latin America
UK: FTSE 100
Stoxx 600
Stoxx 600
FTSE Italy
Spain: IBEX 35
Germany: Dax 30
Germany: Dax 30
Spain: IBEX 35
Euro Stoxx 50
France: CAC 40
revision of 2010E earnings
revision of 2009E earnings
FTSE Italy
France: CAC 40
revision previous two months
revision last month
Euro Stoxx
-10
-5
0
5
10
revision previous two months
revision last month
Euro Stoxx
15
-8
-6
-4
-2
0
2
4
6
Source: Thomson Financial,
Financial IBES and Deutsche Bank estimates
Source: Thomson Financial,
Financial IBES and Deutsche Bank estimates
Forward data are estimates
Forward data are estimates
Dr. Andreas Neubauer · September 2009 · page 18
8
10
Earnings Revisions
IBES IIndex
d E
Earnings
i
ttrends:
d E
Europe (St
(Stoxx 600)
Earnings estimates trend
Earnings revision ratio
0.4
12-month forward earnings
0.2
35
0.0
30
-0.2
2007
2006
25
-0.4
2011
-0.6
20
2010
2008
-0.8
2009
-1.0
Source: Thomson Financial, IBES and Deutsche Bank estimates
Forward data are Deutsche Bank estimates
Dr. Andreas Neubauer · September 2009 · page 19
Jul 200
09
Apr 200
09
Jan 200
09
Oct 200
08
Jul 200
08
Apr 200
08
Jan 200
08
Oct 200
07
Jul 200
07
Apr 200
07
Jan 200
07
Jul 200
06
Oct 200
06
Jan 200
06
Apr 200
06
Jul 200
05
Oct 200
05
Jan 200
05
Apr 200
05
15
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Earnings revisions: Companies with 12-month-forward earnings (ups-downs) / total
Average
3-month moving average
Source: Thomson Financial, IBES and Deutsche Bank estimates
Earnings Revisions
IBES IIndex
d E
Earnings
i
ttrends:
d G
Germany (DAX30)
Earnings estimates trend
Earnings revision ratio
0.8
12-month forward earnings
900
0.6
0.4
800
0.2
700
0.0
-0.2
600
2011
2007
500
2010
2006
-0.4
-0.6
-0.8
400
2009
2008
-1.0
-1.2
Source: Thomson Financial, IBES and Deutsche Bank estimates
Forward data are Deutsche Bank estimates
Dr. Andreas Neubauer · September 2009 · page 20
Jul 200
09
Jan 200
09
Apr 200
09
Oct 200
08
Jul 200
08
Apr 200
08
Jan 200
08
Oct 200
07
Jul 200
07
Jan 200
07
Apr 200
07
Jul 200
06
Oct 200
06
Jan 200
06
Apr 200
06
Jul 200
05
Oct 200
05
Apr 200
05
Jan 200
05
300
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Earnings revisions: Companies with 12-month-forward earnings (ups-downs) / total
Average
3-month moving average
Source: Thomson Financial, IBES and Deutsche Bank estimates
Earnings Revisions
How llong will
H
ill European
E
earnings
i
continue
ti
to
t decline
d li
and is there a chance to recover to the longer trend?
32
Development of forward earings
based on current consensus estimates.
27
22
17
12
The constant growth
rate of the trend
earnings equals 6.1%.
7
1988
1990
1992
1994
1996
1998
12-month rolling earnings forecast (LHS)
Source: I/B/E/S, Datastream, Deutsche Bank
Forward data are Deutsche Bank estimates
Dr. Andreas Neubauer · September 2009 · page 21
2000
2002
2004
2006
2008
Normalised earnings forecast (LHS)
2010
Earnings Revisions
F
Focus
on earnings
i
revisions
i i
in
i recession
i
times
ti
 Even in recession times, when earnings
g uncertainty
y is above usual levels, firms
should stay committed to reporting policy due to sustainable credibility
 A company that has decided to suspend earnings guidance should take into
account a number of issues, including:

Announcement of suspension or discontinuation of guidance

Metrics that will be provided in lieu of EPS

Regulatory considerations
 However
However, the current financial crisis has raised questions that have not been
addressed sufficiently in Annual Reports / Quarterly Reports

Refinancing issues (< 1 year, 1 – 5 years, > 5 years)

Contractant risk (both suppliers and customers)
Risk reporting often only re-active but pro-active
Dr. Andreas Neubauer · September 2009 · page 22
Conclusion
Conclusion
 Earnings
g g
guidance became widelyy suspended
p
in recession and, hence,
earnings uncertainty started to fluctuate much more widely
 Especially in recession times analysts, investors demand contemporary
publication of statements as well as transparent, credible, reliable information
 However, quality of earnings guidance varies among companies and pooled
markets
k t for
f information
i f
ti make
k it iincreasingly
i l diffi
difficult
lt ffor analysts,
l t iinvestors
t
tto
generate investment ideas out of corporate statements
 Even in recession times
times, when earnings uncertainty is above usual levels
levels, firms
should stay committed to reporting policy due to sustainable credibility
Dr. Andreas Neubauer · September 2009 · page 24
Thank y
you for y
your attention
Dr. Andreas Neubauer · September 2009 · page 25
Deutsche Bank
A
Appendix
di 1
Important Disclosures
Additional Information Available upon Request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most
recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Dr. Andreas Neubauer · September 2009 · page 26
Analyst Certification
This report covers more than one security and was prepared by more than one analyst. The views expressed in this report accurately
reflect the personal views of each undersigned lead analyst about the subject issuers covered by each, and the securities of those
issuers. In addition, the undersigned lead analysts have not and will not receive any compensation for providing a specific
recommendation or view in this report. Andreas Neubauer, Ingo Schmitz, Stefan Bielmeier.
Dr. Andreas Neubauer · September 2009 · page 27
Deutsche Bank
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs.
Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche
Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3 Country-Specific Disclosures
3.
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc
Inc. Registration number – Registered as a
financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association
of Japan. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain
categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other
losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or
services, customers should carefully read the relevant disclosures, prospectuses and other documentation.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market
Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity
requiring a license in the Russian Federation.
Dr. Andreas Neubauer · September 2009 · page 28
Deutsche Bank
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Dr. Andreas Neubauer · September 2009 · page 29