An index tracking private middle market companies has foreshadowed a slowdown in revenue and earnings of larger public companies in the third quarter of 2015.
“We expect to see the theme of slower growth play out this earnings season,” said Edward Altman, the Max L. Heine Professor of Finance, Emeritus at the NYU Stern School of Business.
“Middle market companies have historically outperformed their larger public peers, so we anticipate relatively low year-over-year revenue and especially EBITDA growth from S&P component companies in the third quarter,” said Altman.
Altman collaborated with Golub Capital on the Golub Capital Altman Index, which was featured today in the second edition of the quarterly Golub Capital Middle Market Report, which includes an analysis of the index. The index is based on the sales and earnings data of roughly 150 private U.S. companies in Golub Capital’s loan portfolio.
The index showed revenue of privately held middle market companies increased 7.95% year-over-year in the first two months of the third quarter of 2015, compared to 9.26% in the first two months of the second quarter of 2015.
EBITDA rose by 3.95% in the third quarter, compared to an increase of 6.93% year-over-year during the first two months of the second quarter of 2015.
Still, the index shows that private middle market companies remain a resilient driver of economic growth, said Lawrence Golub, Golub Capital’s CEO.
“While revenues and earnings in the period grew at a healthy pace, margins continued to be pressured by such factors as rising labor costs and the strength of the U.S. dollar, which is impacting the pricing power of U.S. firms with international competitors,” Golub said.
The index showed an 8.84% increase in revenue and a 9.88% increase in earnings for the healthcare sector. This was probably due to the Affordable Care Act, which increased access to health care services, the report said.
Revenue of private middle market industrial companies fell 0.68% year-on-year in the third quarter, and earnings of industrial companies fell 1.62%.
Revenue of private middle market information technology companies rose 6.65%, but earnings slumped 3.62%.
“The information technology sector saw negative profit growth, reflecting, we believe, greater investment in product development,” said Golub.
The index contains limited exposure to the financials, utilities, energy, and materials sectors. Thus, calculations are made for the public indexes both including and excluding these sectors.
The index “is the first and only index based on actual sales and earnings data for middle market companies,” the report said.
“The index has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600, as well as quarterly GDP, according to statistical backtesting dating back to 2012, when data began to be tracked,” the report said. — Abby Latour
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