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The Dog That Didn't Bark?
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- Second-quarter total net income expected to be down 28.7% year-over-year
- Third quarter expected to be down 23.2% year-over-year
- Staples and Health Care only sectors expected to post positive growth in second quarter
- Early results much stronger than expected, median surprise 6.8%
- Early positive surprises lead disappointments by 4.7:1 margin
- Consumer Discretionary Sector has 31 positive surprises, no disappointments
- Margins the cause, not revenue growth
- Bottom up estimate for S&P 500 now $60.12 in 2009 versus $59.82 last week.
- S&P 500 now expected to earn $74.41 in 2010 versus $74.48 last week
- Top down estimates $56.54 and $67.79, respectively
- Total estimate increases outnumber cuts by almost 6:5 for 2009
- Upward Revisions outnumber cuts by almost 11:10 for 2010
- Level of increases small given positive earnings surprises
- For 2009, Staples and Health Care lead; Utilities, Telecom lag
- S&P 500 P/E at 16.24x based on 2009 earnings, equates to an earnings yield of 6.16%
- P/E of 13.12x based on 2010 earnings, equates to an earnings yield of 7.62%
- Earnings yields attractive relative to Treasury and corporate bond yields
- Health Care has lowest P/Es of any sector
- Early results bad absolutely, but better than expected, based on 198 reports so far
- Total net income reported $78.9 billion versus $94.0 billion last year, down 16.1%
- Only 31.8% of all reports show positive year-over-year EPS growth
- Staples, Discretionary and Health Care showing positive growth so far
- Remaining firms expected to post 40.3% decline
- Staples and Health Care expected to lead with small increases
- Materials and Energy expected to see massive year-over-year declines
Earnings are coming in much better than expected, with almost 40% of the reports in. While in this report we have not tracked revenues, there seems to be a general pattern where the source of the positive surprises is coming from much better-than-expected margins (both operating and net) rather than from better-than-expected revenue growth. In other words companies are succeeding in cost cutting their way, if not to prosperity, then at least much better than feared results.
While, at the individual company level, this is almost always a positive, it is not necessarily so at the macro level. Cutting costs by reducing head count means that there are fewer jobs and less overall demand in the economy. Still, given the weak state of the economy, I suspect most investors will not be too picky about the source of the earnings improvements.
The one exception to this might be in the financials, where the earnings quality is weak due to FASB caving to political pressure and doing away with mark to market accounting. On the other hand, I have not seen any situations of massive mark-to-market of the liabilities but not the assets like we saw in the first quarter.
The total earnings reported so far is $78.9 billion, a decline of 16.1% from the $94.0 billion the same 198 firms reported a year ago. However, on a sequential basis earnings are up 7.1% from the first quarter pace. Actual earnings growth has been a pretty rare commodity with only 63 firms actually posting higher net income than a year ago.
The median EPS growth rate is a negative 17.3%. (Those still left to report have a median expected EPS growth rate of -13.7%.) While the median EPS growth reported is largely in line with the total net income decline, there is a big difference when it comes to those yet to report.
The total net income of the remaining firms is expected to plunge 40.3%, which is far worse than what we have seen so far, as well as very different from the median. The big decline in total net income for the remaining firms may be in part due to the mix of firms that have reported, with a very small percentage of the total energy earnings in yet (20% of Energy firms have reported, but none of the big guys that represent the bulk of the earnings in the sector). On the other hand it means that the bar is set very low for the remaining firms and we may well see more positive earnings surprises.
Keep in mind that medians are inherently equally weighted with the growth rate of a relatively small firm counting as much as that of an Exxon Mobil (XOM - Analyst Report) or a Wal-Mart (WMT - Analyst Report). Also changes in share count can affect EPS growth, but not total net income growth.
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 A | Q3 '09 E | 2008 A | 2009 E | 2010 E | ||
| Cons. Stap. | 3.69% | -11.06% | 17.24% | -5.15% | 7.69% | -0.21% | 10.04% | ||
| Cons. Disc. | -84.26% | -55.53% | 3.22% | 12.67% | -27.51% | -14.00% | 73.33% | ||
| Health Care | 10.28% | -1.36% | 0.88% | -5.22% | 12.29% | -3.41% | 8.96% | ||
| Financials | -18086.11% | 32.85% | -11.49% | -9.65% | -86.92% | 150.23% | 65.59% | ||
| Technology | -20.21% | -23.77% | -16.60% | -18.93% | 20.28% | -12.86% | 24.40% | ||
| Telecom | -12.58% | -30.23% | -29.60% | -23.65% | 2.55% | -27.54% | 7.73% | ||
| Industrial | -22.94% | -35.39% | -29.89% | -35.66% | -2.86% | -31.04% | 6.62% | ||
| Materials | -81.27% | -65.97% | -55.55% | -60.61% | -11.36% | -53.01% | 61.76% | ||
| Energy | -4.74% | -53.59% | -58.15% | -61.66% | 41.65% | -53.39% | 20.94% | ||
| S&P | -43.58% | -17.88% | -16.07% | -19.43% | -20.83% | -9.62% | 23.71% | ||
| Sector | Q2 '09 | Q2 '08 | Q1 '09 | Q1 '08 |
| Health Care | $18,892 | $18,728 | $19,023 | $19,286 |
| Technology | $14,604 | $17,650 | $12,316 | $16,305 |
| Financials | $13,186 | $14,898 | $16,577 | $12,478 |
| Industrial | $11,839 | $16,887 | $9,529 | $14,749 |
| Cons. Stap. | $9,065 | $7,732 | $7,291 | $8,197 |
| Cons. Disc. | $3,860 | $3,739 | $2,280 | $5,126 |
| Telecom | $3,198 | $4,542 | $3,126 | $4,480 |
| Materials | $2,455 | $5,523 | $1,902 | $5,590 |
| Energy | $1,808 | $4,320 | $1,617 | $3,485 |
| S&P | $78,907 | $94,019 | $73,662 | $89,697 |
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 E | Q3 '09 E | 2008 A | 2009 E | 2010 E | |
| Health Care | 2.36% | 6.47% | -1.63% | -3.58% | 13.01% | -0.32% | 10.65% | |
| Cons.Stap. | 0.10% | -3.16% | -6.80% | -9.26% | 21.51% | -2.23% | 10.71% | |
| Utilities | -0.55% | -1.23% | -10.51% | 0.87% | 1.89% | -2.16% | 8.76% | |
| Telecom | -25.84% | 0.92% | -14.61% | -4.62% | -16.86% | -6.66% | 5.57% | |
| Financials | -676.63% | -64.13% | -15.25% | -258.73% | -146.99% | -193.94% | 36.61% | |
| Cons. Disc. | -101.61% | -37.02% | -37.19% | -16.11% | -27.26% | -2.49% | 24.26% | |
| Technology | -14.00% | -31.18% | -37.68% | -26.23% | 20.17% | -23.41% | 18.53% | |
| Industrials | -10.20% | -36.20% | -41.93% | -36.01% | 10.30% | -32.79% | 8.53% | |
| Energy | -28.24% | -61.35% | -67.60% | -64.34% | 19.91% | -58.98% | 48.33% | |
| Materials | -82.95% | -93.92% | -94.59% | -80.57% | -16.65% | -82.39% | 220.23% | |
| S&P | -71.50% | -36.22% | -40.33% | -26.51% | -15.20% | -16.48% | 23.88% | |
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 E | Q3 '09 E | 2008 A | 2009 E | 2010 E | |
| Cons.Stap. | 1.54% | -6.34% | 2.75% | -7.54% | 15.47% | -1.40% | 10.43% | |
| Health Care | 8.22% | 0.52% | 0.23% | -4.79% | 12.47% | -2.63% | 9.40% | |
| Utilities | -0.55% | -1.23% | -10.51% | 0.87% | 1.89% | -2.16% | 8.76% | |
| Financials | -992.86% | 4.20% | -12.83% | 251.82% | -106.72% | -642.98% | 54.04% | |
| Telecom | -18.08% | -18.86% | -24.02% | -16.35% | -5.68% | -19.73% | 6.79% | |
| Cons. Disc. | -96.07% | -43.30% | -26.56% | -8.09% | -27.34% | -6.05% | 38.13% | |
| Industrials | -19.82% | -35.61% | -33.36% | -35.76% | 0.54% | -31.54% | 7.15% | |
| Technology | -14.00% | -31.18% | -37.68% | -26.23% | 20.17% | -23.41% | 18.53% | |
| Energy | -26.01% | -60.57% | -66.60% | -64.08% | 21.87% | -58.39% | 45.13% | |
| Materials | -81.98% | -74.07% | -69.15% | -69.91% | -13.36% | -63.70% | 89.71% | |
| S&P | -58.59% | -27.16% | -28.72% | -23.15% | -18.11% | -13.06% | 23.79% | |
| Sector | 2Q '09 (A) | 3Q '09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Healthcare | 7.14% | 4.55% | 16.00% | 3.81% | 10.60% |
| Cons. Stap. | 0.00% | -1.89% | 9.76% | 1.34% | 9.33% |
| Cons. Disc. | -6.90% | -7.39% | -7.69% | -7.16% | 10.53% |
| Industrial | -21.83% | -22.04% | 8.22% | -18.84% | 12.97% |
| Tech | -27.78% | -30.16% | 9.56% | -18.97% | 13.74% |
| Telecom | -28.95% | -23.88% | 1.44% | -26.75% | 7.73% |
| Materials | -39.56% | -37.96% | -4.62% | -36.28% | 10.38% |
| Financial | -46.73% | -32.54% | -27.39% | -28.80% | 8.94% |
| Energy | -56.34% | -62.81% | 18.09% | -55.94% | -5.69% |
| S&P 500 | -17.43% | -18.15% | 3.18% | -11.35% | 10.61% |
| Sector | 2Q '09 (E) | 3Q '09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Healthcare | 5.12 | 3.75 | 16.37 | 11.11 | 10.69 |
| Utilities | 0.80 | -3.70 | 9.28 | 3.79 | 7.44 |
| Cons. Stap. | 0.00 | 6.15 | 12.66 | 10.27 | 10.26 |
| Telecom | -2.44 | -8.98 | 11.23 | -5.20 | 6.79 |
| Financial | -10.23 | 5.41 | 12.89 | -7.45 | 6.50 |
| Tech | -13.15 | 2.16 | 20.34 | 16.31 | 12.68 |
| Cons. Disc. | -17.13 | -5.30 | 8.59 | -5.48 | 11.85 |
| Industrial | -21.48 | -14.64 | 17.50 | 14.51 | 8.67 |
| Materials | -30.77 | 4.00 | 10.85 | -9.01 | 13.63 |
| Energy | -64.31 | -17.20 | 12.35 | 21.90 | 20.58 |
| S&P 500 | -13.73 | 0.00 | 13.72 | 6.84 | 10.70 |
Surprises Scorecard:
| Sector | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match | ||||
| Healthcare | 47.17% | 4.29% | 21 | 3 | 1 | ||||
| Cons. Stap. | 36.59% | 3.37% | 11 | 3 | 1 | ||||
| Cons. Disc. | 38.27% | 13.33% | 31 | 0 | 0 | ||||
| Industrial | 48.28% | 5.99% | 21 | 4 | 3 | ||||
| Tech | 46.67% | 7.13% | 24 | 4 | 7 | ||||
| Telecom | 11.11% | 5.88% | 1 | 0 | 0 | ||||
| Materials | 53.57% | 15.09% | 12 | 1 | 2 | ||||
| Financial | 50.00% | 7.06% | 23 | 15 | 2 | ||||
| Energy | 20.00% | 7.38% | 5 | 2 | 1 | ||||
| S&P 500 | 39.60% | 6.84% | 149 | 32 | 17 | ||||
The Zacks Revisions Ratio: 2009
- Revisions ratio for full S&P 500 up to 1.19, from 1.02
- Given level of positive surprises, increase in revisions ratio is very small
- Five sectors in positive territory, Staples and Health Care lead
- Industrials, Utilities and Telecom continue to see estimates cut
- Ratio of firms with rising to falling mean estimates up to 1.02 from 0.96
- Total number of revisions (4 week total) up to 2,560 from 2,060 (24.3%)
- Increases up to 1,389 from 1,038 (33.8%), cuts up to 1,171 from 1,022 (14.5%)
- Total Revisions activity rising rapidly
So far, this is looking like the story of the dog that didn't bark. Yes, the revisions ratio has edged up, but given the magnitude and number of positive surprises in second quarter earnings, one would expect a flood of positive estimate revisions.
After all the second quarter is part of the full year 2009, so if a company beats the estimates for the quarter, and the analysts do not raise their estimates for the full year by the amount of the beat, then they are implicitly cutting their forecasts for the third and fourth quarters. There is a very good possibility that this is simply a lag effect in the data, as the pace of reports has really picked up in the last few days. If so we should see the revisions ratios rise dramatically over the next few weeks. If not, it will be a subtle, but very disturbing sign.
The defensive Staples and Health Care sectors are doing the best on the revision front. However, Materials is about as cyclical a sector as you can think of and it has shown a great improvement in its revisions ratio, apparently in response to the much better-than-expected earnings in the sector. Utilities are the weakest sector, followed by the very small Telecom sector. No Utilities have reported yet and only one Telecom company (AT&T (T - Analyst Report)) has reported.
In the Staples and Health Care sectors, analysts generally tend to be in tight agreement about the expected earnings (small standard deviation around the mean estimate). They, therefore, will not show up on screens of the biggest estimate revisions. On the other hand it means that even small changes in the mean estimate can be significant, and it is best to look for large numbers of analysts changing their estimates in one direction, rather than for big changes in the mean estimate.
In Health Care, the big drug companies stand out in this regard. Among the notables are Johnson & Johnson (JNJ - Analyst Report), Eli Lilly (LLY - Analyst Report) and Schering-Plough (SGP). The same is true for the staples, where some of the stocks with large numbers of estimate increases include Pepsi Bottling Group (PBG), General Mills (GIS - Analyst Report) and Colgate Palmolive (CL - Analyst Report).
The Materials sector is much more prone to big changes in earnings estimates. There, Freeport-Mcmoran (FCX - Analyst Report) was a real stand out with its mean estimate for 2009 leaping by over 80% in the last four weeks.
| Sector | Avg. 4wk EPS Change (FY1) | Revisions Ratio | Firms With FY1 EPS Increase | Firms With FY1 EPS Decrease |
| Consumer Staple | 0.10% | 3.14 | 25 | 10 |
| Health Care | 0.23% | 2.18 | 38 | 12 |
| Materials | 1.65% | 1.82 | 12 | 10 |
| Technology | 2.15% | 1.74 | 36 | 27 |
| Consumer Disc | -0.69% | 1.65 | 42 | 33 |
| Financial Services | -2.24% | 0.85 | 28 | 51 |
| Energy | -2.40% | 0.75 | 19 | 20 |
| Industrials | -1.65% | 0.66 | 17 | 37 |
| Telecom | -0.71% | 0.34 | 1 | 8 |
| Utilities | -0.09% | 0.26 | 13 | 18 |
| S&P 500 | -0.42% | 1.19 | 231 | 226 |
The Zacks Revisions Ratio: 2010
- Revisions weaker for 2010 than 2009, but still net positive
- Revisions ratio falls to 1.10 from 1.17
- Tech and Staples showing best estimate momentum for 2010
- Industrials and Utilities getting cut
- The ratio of rising to falling mean estimates falls to 0.93 from 1.01
- Total revisions activity past lows for the quarter
- Total number of revisions rises to 2,142 from 1,647 (30.1%)
- Estimate increases up to 1,123 from 888 (26.4%), cuts up to 1,019 from 759 (34.3%)
| Sector | Avg. 4wk EPS Change (FY2) | Revisions Ratio | Firms With FY2 EPS Increase | Firms With FY2 EPS Decrease |
| Consumer Staples | 0.13% | 3.27 | 28 | 7 |
| Technology | 1.99% | 2.10 | 35 | 25 |
| Health Care | -0.10% | 1.47 | 33 | 17 |
| Consumer Discr | -2.12% | 1.43 | 34 | 39 |
| Materials | -1.82% | 1.17 | 11 | 14 |
| Financial Services | -5.42% | 0.80 | 21 | 52 |
| Energy | -1.14% | 0.68 | 21 | 19 |
| Telecom | -0.04% | 0.60 | 2 | 6 |
| Industrials | -0.65% | 0.56 | 23 | 27 |
| Utilities | -0.79% | 0.40 | 5 | 22 |
| S&P 500 | -1.21% | 1.10 | 213 | 228 |
- Health Care expected to take Earnings crown from Energy in 2009 and keep it in 2010
- Energy's earnings share expected to plunge to 11.1% from 23.2%
- Financials' 2009 earnings share expected to rise to 11.6% from -1.8% in 2008
- 12-month forward S&P P/E of 14.37 equates to earnings yield of 6.96%, which is very attractive relative to 10-year T-note yield of 3.66%, but mediocre relative to 6.49% A-rated 10-year corporate.
- Health Care has the lowest P/E sector for both 2009 and 2010; its market cap share (index weight) well below its earnings share
- Earnings share, including historical, based on current make up of S&P 500
| Sector | 2008% | 2009% | 2010% | Market Cap % | P/E 2008 | P/E 2009 | P/E 2010 |
| Technology | 16.73% | 16.10% | 15.92% | 19.56% | 16.5 | 19.7 | 16.1 |
| Health Care | 16.13% | 18.08% | 15.98% | 13.28% | 11.6 | 11.9 | 10.9 |
| Financials | -1.79% | 11.55% | 14.37% | 12.96% | NM | 18.2 | 11.8 |
| Cons Staple | 12.91% | 14.66% | 13.08% | 12.83% | 14.0 | 14.2 | 12.9 |
| Energy | 23.17% | 11.10% | 13.02% | 11.88% | 7.2 | 17.4 | 12.0 |
| Industrials | 13.53% | 10.66% | 9.23% | 9.70% | 10.1 | 14.8 | 13.8 |
| Cons Disc. | 6.80% | 7.35% | 8.21% | 9.44% | 19.6 | 20.8 | 15.1 |
| Utilities | 4.50% | 5.08% | 4.46% | 3.86% | 12.1 | 12.3 | 11.3 |
| Materials | 3.79% | 1.58% | 2.43% | 3.28% | 12.2 | 33.6 | 17.7 |
| Telecom | 4.23% | 3.83% | 3.31% | 3.21% | 10.7 | 13.6 | 12.7 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 14.1 | 16.2 | 13.1 |
Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Thursday 7/23/2009
Read the full analyst report on LLY
Read the full analyst report on JNJ
Read the full analyst report on CL
Read the full analyst report on GIS
Read the full analyst report on T
Read the full analyst report on FCX
Read the full analyst report on XOM
Read the full analyst report on WMT
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