Good Riddance to Q4 Earnings Season

Highlighted stocks include American International Group (AIG - Analyst Report) and Citigroup (C - Analyst Report).

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Key Points:

• Total net income in 2009 now expected to fall 7.1%, following 19.5% 2008 decline
• More than 20% of all 2009 mean estimates down more than 10%; 14% down more than 25% over the last month. For 2010, 27.4% down more than 10%, 13.4% down more than 20%
• 2009 expectations down 8.0% over the last month, 2010 down 6.2%
• P/Es based on 2009 estimates will prove to be to low as "E" plunges
• Financials red ink $18.1 billion versus $9.6 Billion black ink last year
• Bottom up estimate for S&P 500 now $59.93 in 2009, down from $62.74 a week ago. I think we will be lucky if it is over $50. Was $65.12 a month ago.
• S&P 500 (SPX) now expected to earn $74.68 in 2010, down from $78.34 last week, $80.79 a month ago.

Total Net Income Growth

Earnings Expectations continue to plunge for both 2009 and 2010.

Over the last week, the 2009 bottom up estimate has fallen a stunning 4.5%, and are down 8.0% over the last month. The decline for 2010 has been just as bad, with a 4.7% decline in the last week and a 7.6% decline over the last month.

Just because the market is going down like a rock, doesn't mean that valuations are improving significantly. The trend in estimate data is always more important than the level, and you will get a better final estimate of where things will really end up if you extrapolate the trend out rather than basing your decisions on the current level.

I think that we will probably end up with earnings in the $50 area for 2009 and perhaps $60 for 2010, but I must say that there is more risk to the downside of those figures than to the upside. Keep in mind that these figures exclude one time items, and the vast majority of extraordinary items are going to be negative.

The fourth-quarter earnings season, is almost completely finished, and good riddance. It was an unmitigated disaster, especially on a total net income basis. The numbers showed a very significant deterioration from last week due to the latest news from the great black hole known as American International Group (AIG - Analyst Report). Taken as a whole, and excluding extraordinary one time charges, the Financial sector lost a total of $57.7 billion in the fourth quarter. The same stocks earned $6.8 billion a year ago. In the third quarter of 2007, the last quarter before the wheels started to fall off the world financial system, they earned almost $43 billion.

However, Financials were not alone in seeing huge drops in net income. Only 2 sectors, the defensive Health Care and Staples sectors, managed to post higher total net income than a year ago, and neither by double digits. Utilities took the bronze for the quarter due to just a fractional decline in total income. The cyclical Consumer Discretionary and Materials sectors were disasters by just about any measure, with declines of 92.8% and 80.2%, respectively.

Looking ahead to the first quarter, every sector is expected to see a decline in total net income relative to the first quarter of 2008. For eight of the sectors, the year-over-year declines are expected to be worse than the fourth quarter. All told, a 34.5% year-over-year decline is currently expected.

The only exceptions are the Financial and Materials sectors. While the Financials may break back into the black this quarter, and a year ago was not exactly a boom time for the sector, I suspect that they will do much worse than the 13.9% decline forecast. As for the Materials, its hard to get to excited about a 70% decline in earnings, even if that is not as bad as an 80% decline.

Total Net Income Growth (Reported)
Sector	Q2 '08 A	Q3 '08 A	Q4 '08 A	Q1 '09 E	2007 A	2008 A	2009 E	2010 E
Health Care	7.07%	8.69%	8.69%	-4.17%	19.71%	9.05%	0.68%	10.59%
Cons. Stap.	13.00%	6.10%	6.10%	-15.92%	7.09%	9.84%	5.20%	6.72%
Utilities	-6.61%	-0.53%	-0.53%	-4.46%	11.19%	3.04%	0.42%	10.18%
Telecom	-15.68%	-17.54%	-17.54%	-27.23%	17.16%	-5.80%	-19.46%	8.54%
Industrial	0.83%	-20.42%	-20.42%	-32.09%	10.11%	1.36%	-20.25%	7.73%
Technology	7.65%	-24.06%	-24.06%	-32.46%	11.51%	15.18%	-18.82%	20.95%
Energy	56.73%	-25.55%	-25.55%	-54.12%	9.03%	19.49%	-47.75%	35.88%
Materials	2.03%	-80.22%	-80.22%	-70.45%	9.84%	-8.46%	-42.39%	40.08%
Cons. Disc.	-45.65%	-92.81%	-92.81%	-105.06%	0.49%	-54.56%	-19.18%	121.03%
Financials	-89.32%	-936.31%	-936.31%	-13.94%	-17.93%	-104.92%	-975.40%	56.45%
S&P	-11.61%	-58.28%	-58.28%	-34.28%	2.81%	-19.88%	-7.07%	24.80%

Total Net Income (Reported)
Sector	Q4 '08	Q4 '07	Q3 '08	Q3 '07
Health Care	$25,903	$23,833	$26,183	$24,455
Energy	$25,369	$34,074	$46,066	$29,392
Technology	$23,455	$30,888	$26,848	$24,939
Cons. Stap.	$19,960	$18,813	$21,648	$19,157
Industrial	$19,282	$24,229	$22,989	$22,801
Telecom	$6,251	$7,581	$6,502	$7,710
Utilities	$5,647	$5,677	$8,534	$9,138
Materials	$1,161	$5,870	$6,752	$6,618
Cons. Disc.	$942	$13,101	$7,451	$13,710
Financials	($56,689)	$6,778	$4,588	$42,952
S&P	$71,281	$170,845	$177,559	$200,871

Total Net Income Growth (Not Reported)
Sector	Q2 '08 A	Q3 '08 A	Q4 '08 E	Q1 '09 E	2007 A	2008 E	2009 E	2010 E
Cons. Stap.	47.70%	36.90%	51.57%	3.20%	-68.54%	-82.98%	-82.83%	7.06%
Industrials	33.09%	351.04%	46.32%	21.34%	-58.18%	-92.76%	-81.83%	11.27%
Cons. Disc.	16.56%	-23.31%	-5.87%	-60.65%	-56.42%	-76.00%	-64.96%	19.50%
Technology	73.98%	9.23%	-123.49%	-112.19%	-80.07%	-68.44%	-251.10%	-194.48%
S&P	22.25%	-6.55%	3.49%	-46.69%	9.19%	19.99%	-10.81%	16.09%

Total Net Income Growth (Combined)
Sector	Q2 '08 A	Q3 '08 A	Q4 '08 E	Q1 '09 E	2007 A	2008 E	2009 E	2010 E
Health Care	8.84%	7.07%	8.69%	-4.17%	19.71%	9.05%	0.68%	10.59%
Cons. Stap.	2.04%	13.45%	7.00%	-15.41%	7.22%	10.73%	5.19%	6.73%
Utilities	7.10%	-6.61%	-0.53%	-4.46%	11.19%	3.04%	0.42%	10.18%
Telecom	-3.69%	-15.68%	-17.54%	-27.23%	17.16%	-5.80%	-19.46%	8.54%
Industrial	6.23%	1.08%	-20.30%	-31.95%	10.04%	1.49%	-20.20%	7.74%
Technology	17.51%	7.66%	-24.19%	-32.59%	11.61%	15.16%	-18.92%	21.01%
Energy	16.53%	56.73%	-25.55%	-54.12%	9.03%	19.49%	-47.75%	35.88%
Materials	6.18%	2.03%	-80.22%	-70.45%	9.84%	-8.46%	-42.39%	40.08%
Cons. Disc.	-58.72%	-43.68%	-83.15%	-98.94%	1.06%	-49.00%	-18.46%	101.35%
Financials	-53.58%	-89.32%	-936.31%	-13.94%	-17.93%	-104.92%	-975.40%	56.45%
S&P	-10.90%	-11.56%	-57.53%	-34.46%	2.87%	-19.53%	-7.12%	24.69%

Scorecard and Median EPS Growth Rates

• Median EPS growth of 489 firms reporting is -8.3%
• Those firms expected to see a 19.0% decline in first quarter
• Yet-to-report firms expected to be down 11.9% in fourth quarter, 8.3% first quarter
• Surprise ratio 1.77, median surprise 2.58% - both below normal
• Health Care still healthy with 13.3% growth, others flat or down
• Health Care, Staples Industrials doing well on Surprise front
• All sectors except Health Care expected to be negative in first quarter

Median EPS growth held up better than total net income. The effect of mind boggling losses like AIG and Citigroup (C - Analyst Report) simply do not affect a median the same way they affect the total net income figures. Still, an 8.3% decline is not very good, yet it looks like that will be better than the first quarter where the expected decline is 19.0%.

Health Care is the only sector that is expected to see more of its firms grow than shrink their earnings in the quarter. The relatively defensive Staples, Utilities and Telecom sectors are expected to hold the median declines to the mid single digits, but every other sector is looking at a drop of over 20%.

Still more firms reported EPS that were higher than analysts estimates than disappointed, by a ratio of 1.77:1. That is well below the "normal" rate of over 3:1, but it is better than having more disappointments than positive surprises. Long ago companies figured out that it is better to under promise and over deliver, so they keep their guidance conservative, and the analysts thus lowball their estimates.

Health Care had the most impressive ratio of positive surprises at 10:1, and a very solid median surprise of 3.76%. Since for the most part, firms in that sector are smooth steady earners, the analysts estimates tend to be more tightly grouped together than in more cyclical sectors like Materials or Consumer Discretionary. Thus, even though the median surprise is lower for health care than it is for the other 2, it is probably more significant. Only 3 other sectors managed to get over the 2:1 ratio of positive to negative surprises.

Fourth-Quarter Scorecard (Reported)
Sector	4Q '08 (A)	1Q '09 (E)	2008 (A)	2009 (E)	2010 (E)	% Reported	Median % Surprise	# Pos Surprise	# Neg Surprise	# Match
Healthcare	13.34%	3.49%	13.56%	5.15%	10.84%	100.00%	3.76%	40	4	10
Utilities	0.77%	-5.22%	3.01%	0.57%	8.67%	100.00%	2.56%	19	11	4
Industrial	-0.16%	-23.73%	13.71%	-11.92%	7.56%	98.31%	2.65%	36	11	11
Energy	-3.45%	-25.58%	21.40%	-39.95%	20.97%	100.00%	2.06%	21	17	1
Cons. Stap.	-3.69%	-2.50%	8.94%	2.70%	8.41%	92.50%	2.44%	25	9	3
Telecom	-9.86%	-5.07%	3.03%	-6.13%	1.54%	100.00%	6.02%	5	3	1
Tech	-10.17%	-29.17%	18.00%	-19.04%	9.91%	98.67%	4.17%	45	21	8
Cons. Disc.	-31.13%	-32.35%	-12.64%	-16.61%	10.30%	92.50%	4.27%	46	26	2
Financial	-34.21%	-29.43%	-21.23%	-3.51%	10.70%	100.00%	-7.37%	28	48	5
Materials	-44.68%	-56.47%	-4.62%	-24.03%	13.55%	100.00%	4.62%	18	10	1
S&P 500	-8.33%	-18.96%	6.67%	-6.56%	10.18%	97.80%	2.58%	283	160	46

Fourth-Quarter EPS Growth (Yet-to-Report)
Sector	4Q '08 (E)	1Q '09 (E)	2008 (A)	2009 (E)	2010 (E)
Cons. Stap.	-0.94%	7.56%	12.69%	12.95%	3.56%
Industrial	-3.70%	-3.28%	-24.44%	91.18%	11.27%
Cons. Disc.	-22.58%	-14.14%	14.27%	12.12%	19.73%
Tech	-125.00%	-113.70%	613.33%	-20.56%	-194.50%
S&P 500	-11.91%	-8.33%	14.27%	12.55%	11.27%

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 up to 0.27, from 0.26 last week
• Health Care the strongest, in neutral territory
• 9 sectors have at least 2 cuts for every increase; 6 have at least 4 cuts per increase
• 30.2% of all firms see mean estimate decline by more than 10%; 14.0% more than 25%
• Ratio of firms with rising to falling mean estimates at 0.21, down from 0.22
• Total number of revisions (4-week total) down to 2,931 from 3,581 last week (-18.2%)
• Increases down to 629 from 728 (-13.6%); cuts down to 2,302 from 2,853 (-19.3%)
• Estimate activity past seasonal peak, falling fast

The revisions ratio has been in a gradual uptrend for several weeks now, but remains in very negative territory. Generally we consider anything below 0.80 to be negative, and anything above 1.25 to be positive. Only health Care has made into neutral territory.

The overall pace of estimate revisions is slowing dramatically, as it usually does after earnings season is over. The revisions ratio is based on the four week moving totals of estimate changes. Thus the rise in the ratio may have more to do with old estimate cuts falling off faster than old estimate increases than it does with new estimate revisions.

Sector	Avg. 4wk EPS Change (FY09)	Revisions Ratio	Firms With FY09 EPS Increase	Firms With FY09 EPS Decrease
Health Care	-0.47%	1.00	19	30
Technology	-4.37%	0.46	15	54
Telecom	-7.99%	0.41	3	6
Consumer Staple	-1.39%	0.34	11	26
Consumer Disc	-9.10%	0.22	14	60
Materials	-8.30%	0.21	3	23
Energy	-15.07%	0.20	2	36
Utilities	-7.21%	0.16	4	29
Industrials	-4.89%	0.14	6	50
Financial Services	-10.57%	0.12	6	73
S&P 500	-6.84%	0.27	83	387

The Zacks Revisions Ratio: 2010

• Sample size of 2010 revisions is thin, but starting off weak
• Revisions ratio remains at 0.27
• Mean estimates to be affected by new estimates as much as revisions
• More than 3 cuts per increase for 8 sectors, more than 4 per increase in 6 sectors
• Health Care the "strongest"; Financials falling apart even for 2010
• Ratio of rising to falling mean estimates remains at 0.24
• Total number of revisions falls to 1,381 from 1,672 (-9.6%)
• Estimate increases fall to 290 from 360 (-19.4%), cuts fall to 1,091 from 1,312 (-12.5%)

The 2010 revisions ratio story is pretty much the same as 2009, awful, but not quite as awful as it was a few weeks ago. The overall pace of revisions slowing, and Health Care the best on a relative basis, but nothing to really write home about.

Sector	Avg. 4wk EPS Change (FY10)	Revisions Ratio	Firms With FY10 EPS Increase	Firms With FY10 EPS Decrease
Health Care	-0.93%	0.61	17	29
Technology	-6.34%	0.46	21	44
Materials	-6.23%	0.29	6	21
Telecom	-1.49%	0.29	3	6
Consumer Discr	-11.89%	0.22	7	61
Utilities	-4.16%	0.20	3	26
Consumer Staples	-2.88%	0.19	3	32
Energy	-12.44%	0.17	6	31
Industrials	-5.37%	0.14	10	44
Financial Services	-8.63%	0.14	11	66
S&P 500	-6.84%	0.27	87	360

Earnings Shares and P/Es

• P/Es are too low since earnings estimates are too high
• Earnings shares, including historical, are based on current make up of S&P 500
• Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
• Energy's earnings share expected to plunge to 13.3% from 22.1%
• Financials' 2010 earnings share expected to rise to 12.2% from 4.2% in 2008.
• Consumer Discretionary market cap share far above earnings shares (overvalued?)
• S&P P/E of 11.4 equates to earnings yield of 8.77% and is very attractive relative to 10 year T-note yield of 2.88%, but only mediocre relative to 6.19% A-rated 10 year corporate.
• T-note rates are rising and more realistic earnings yields of near 7.32% based on lower earnings ($50) means the spread, while still attractive is not overwhelming.

Earnings Shares and P/Es
Sector	2008%	2009%	2010%	Market Cap %	P/E 2008	P/E 2009	P/E 2010
Technology	15.81%	14.61%	14.19%	18.33%	11.7	14.3	11.8
Health Care	15.45%	17.81%	15.81%	15.21%	9.9	9.7	8.8
Cons Staple	12.35%	14.42%	12.35%	14.78%	12.1	11.7	10.9
Energy	22.11%	13.26%	14.46%	13.30%	6.1	11.4	8.4
Industrials	13.47%	12.24%	10.51%	9.29%	7.0	8.6	8.1
Financials	4.19%	12.24%	15.41%	9.11%	21.9	8.5	5.4
Cons Disc.	4.33%	4.23%	6.83%	8.76%	20.4	23.6	11.7
Utilities	4.39%	4.96%	4.40%	4.23%	9.7	9.7	8.8
Telecom	4.16%	3.76%	3.27%	3.92%	9.5	11.9	11.0
Materials	3.75%	2.45%	2.76%	3.08%	8.3	14.3	10.2
S&P 500	100.00%	100.00%	100.00%	100.00%	10.1	11.4	9.1

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 3/5/2009

Read the full analyst report on C

Read the full analyst report on AIG