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Higher Gas Prices Hit Profits at Consumer Mid-Market Firms

January 25, 2016


Higher oil and gas prices hurt profits at consumer-oriented businesses during the first two months of the second quarter, according to a report from Golub Capital. The companies’ revenues remained strong, however, as higher wages may have boosted consumer spending.

Consumer company profit growth fell to its lowest level since 2013, according to the Golub Capital Altman Index. The index measures the median revenue and earnings growth of almost 200 companies in Golub Capital’s $18 billion loan portfolio.

The Golub Capital Altman Index is correlated to the revenue and profit growth of various indexes, such as the S&P 500 and Russell 2000, as well as quarterly gross domestic product.

Profits at consumer discretionary companies such as veterinarian services firms and massage therapists fell 0.16% during the quarter. Profits at consumer staples companies such as restaurants fell 2.77%. Revenue growth was strong, however, with consumer and discretionary companies recording 7.57% and 8.71% growth, respectively.

“Revenue was surprisingly strong, given that oil prices are up,” said Lawrence Golub, CEO of Golub Capital. He said the increase could be a reflection of higher wage rates, because employees have more disposable income.

Overall, revenue at middle-market private companies rose during the first quarter, but higher energy costs slowed profit growth.

Revenue among all companies in the index rose 7.4% during the first two months of the second quarter, compared with a year earlier. Meanwhile, Ebitda increased 2.01%.

The growth has slowed from the first quarter when revenue increased 9.08% and Ebitda increased 5.05%.

Industrial companies benefited from a weaker dollar in the first part of the quarter registering double-digit profit growth. The dollar strengthened in June, however, and those effects weren’t recorded in the report.

Mr. Golub said the strong dollar won’t affect companies until the third quarter. Many mid-market companies may have to lower prices to compete with foreign rivals, who will benefit from weaker currencies.

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