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Earnings of US mid-market companies slow markedly

The Golub Capital Altman Index demonstrates how the post-lockdown boom has started to moderate.

Earnings growth at US mid-market companies slowed to 9 percent in the first two months of 2022 from the year-earlier period, according to the Golub Capital Middle Market Report.

“The boom part of 2021 boomflation has started to decelerate,” Lawrence E Golub, chief executive officer of Golub Capital, said in a release announcing the results of the report, which is based on the Golub Capital Altman Index. Although revenue grew 18 percent in the period, earnings growth was closer to flat when adjusting for the nearly 8 percent increase in inflation, which has soared in recent months. By comparison, earnings growth surged to a record 16.3 percent in the year-ago equivalent period.

“The economy is still strong and the 18 percent nominal growth in revenue year-over-year is good, but it is not great,” Golub said, noting that higher input and labour costs are weighing down profitability, even in the manager’s market-leading businesses in resilient industries. Nevertheless, Golub said that “demand remains robust, and companies will continue to adapt if inflation remains high”.

Golub was one of the first executives to express concerns about inflation, telling Private Debt Investor a year ago that fiscal and monetary stimulus was creating “very substantial risks” for the economy and inflation. At the time, he said that US Federal Reserve chairman Jerome Powell and the Fed were “speaking as though they have a pollyannaish vision of risks”.

New York University professor and economist Edward Altman, a co-collaborator of the Golub index, said that with the Fed on track to raise interest rates substantially, the current data “suggests that investors would do well to prepare for a possible scenario of stagflation”, a situation where inflation remains high and the economic growth rate slows.

“The margin compression we’ve seen in the last three quarters marks a reversal of trend from the considerable margin expansion during the recovery from covid lockdowns,” Altman said. “We will continue to monitor our data for early economic signs of recovery or recession.”

The Golub Capital Altman Index measures the median revenue and earnings growth of more than 150 private companies across a wide range of industries in the loan portfolio of Golub Capital, a leading direct lender and credit asset manager with more than $45 billion of capital under management.