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Earnings Trends

Key Points:

  • The Fourth Quarter earnings season is effectively over.  Started out very poor, but improved to mediocre as the season wore on.  Total reported earnings growth is 5.64% for the 492 firms (98.4%) that have reported so far, but those represent 99.6% of total expected earnings.  Ex-Financials growth is 6.15% year over year.   Total revenue growth 5.53%, 8.08% ex Financials.  Median earnings surprise 2.27% and median sales surprise 0.19%.  Net margins reported rise to 9.01% from 8.98% last year.
  • Sharp slowdown from the 14.89% earnings, and 11.30% revenue growth those same 492 firms reported in the third quarter.
  • For remaining 33 firms, year over year growth expected to fall to -25.08% in fourth quarter, -28.06% excluding Financials.  Dramatic slowdown, but easy hurdle to clear.  
  • Full year total earnings for the S&P 500 jumps 44.8% in 2010, expected to rise 15.3% further in 2011.  Growth to continue in 2012 with total net income expected to rise 9.4%.  Financials major earnings driver in 2010.  Excluding Financials growth was 28.2% in 2010, and expected to be 17.4% in 2011 and 6.6% in 2012.  Growth of 12.5%, 12.1% ex-financials expected for 2013  
  • Total revenues for the S&P 500 rise 7.99% in 2010, expected to be up 8.73% in 2011, and just 1.39% in 2012.  Excluding Financials, revenues up 9.34% in 2010, expected to rise 10.90% in 2011 and 3.44% in 2012.  For 2013, 4.98% growth expected, 4.80% ex financials.
  • Annual Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.34% for 2010, 8.82% expected for 2011 and 9.52% in 2012.  Margin expansion major source of earnings growth.  Net margins ex financials 7.79% in 2008, 6.93% in 2009, 8.09% for 2010, 8.56% expected in 2011, 8.82% in 2012. For 2013 10.22% expected, 9.44% ex financials.
  • Revisions ratio for full S&P 500 at 0.91 for 2012 (neutral), at 0.99 for 2013 (neutral). Ratio of firms with rising to falling mean estimates at 0.91 for 2012 (neutral), 0.92 (neutral) for 2013.  Total revisions activity past seasonal peak, and falling fast.  
  • S&P 500 earned $788.8 billion in 2010, expected to climb to $891.8 billion in 2011.  In 2012 the 500 are collectively expected to earn $975.2 billion. For 2013 $1.098 Trillion expected.  
  • S&P 500 earned $56.79 in 2009: $81.12 in 2010 and $94.63 in 2011 expected bottom up.  For 2012, $103.47 expected, $116.45 for 2013.  Puts P/E’s at 14.52 for 2011, and 13.28x for 2012 and 11.80x for 2013, very attractive relative to 10 year T-note rate of 1.97%.  


The Earnings Picture

While we started out the fourth quarter earnings season on a very weak note, the picture has improved as the season has worn on.  I would not want to suggest that this has been a good earnings season, but it is not the ugly one it appeared to be just a few weeks ago. The season is effectively over now.  So far 492, or 99.4% of the firms have reported.  However, assuming that all the remaining firms report exactly in like with expectations, then 99.6% of all earnings are in.  

Normally, when all is said and done, the median surprise runs about 3.00% and the ratio about 3.0.  So far, the median is at 2.27% and the ratio is 2.27.  While we don’t have the drama of multi-billion dollar bank losses, this is still the weakest earnings season since the depths of the Great Recession.   

In most recent quarters, we have started out of the gate much faster than that only to fade towards those levels, this time the reverse is true, but we are running out of real estate to catch up.  Total net income for the 492 that have reported is 5.64% above a year ago.  It is less than half the 14.89% growth rate that the same 492 firms reported in the third quarter.

The picture is similar if we take the Financials out of the picture.   Without them, the year over year rise in net income is 6.15%, down from 17.76% growth in the third quarter.  Sequentially, total net income so far is 3.22% below the third quarter, or 3.63% lower ex financials.  The pressure on the growth rate is coming from both the numerator and the denominator (year ago earnings growth was strong, and thus tougher comps).

The remaining seven firms are too small and few to have any significant impact on the overall results, thus we skip the expected income growth, sales growth and net margin tables this week.  Eleven of the 16 sectors are done with earnings season.  Provided the remaining firms report in line with expectations, the final year over year growth should be 5.61%.

Revenue growth has also slowed down, with the 492 reporting 5.53% growth.   If we exclude the Financials that have reported, revenue is up 8.08% year over year.  In the third quarter, revenue growth was 11.30, or 13.20% excluding Financials.  

For the 492, net margins have come in at 9.01%, up from 8.98% a year ago, and down from 9.47% in the third quarter. Excluding the financials, net margins are 8.13%, down ever so slightly from 8.14$ a year ago and well off the 8.64% of the third quarter.  While in an absolute sense, those are still very healthy net margins, much higher than the average of the last 50 years or so, but they are no longer expanding significantly.  Then again, it was unrealistic to expect that they would always rise.  It does mean that earnings growth is going to be harder to come by going forward.

On an annual basis (all 500), net margins continue to march northward.  In 2008, overall net margins were just 5.88%, rising to 6.27% in 2009.  They hit 8.34% in 2010 and are expected to continue climbing to 8.82% in 2011 and 9.52% in 2012.  The very preliminary expectation is that they will rise to 10.22% in 2013.  

The pattern is a bit different if the Financials are excluded, as margins fell from 7.78% in 2008 to 6.93% in 2009, but have started a robust recovery and rose to 8.09% in 2010.  They are expected to rise to 8.56% in 2011.  They are expected to rise to 8.82% in 2012, and then up to 9.44% in 2013.  There should be some caution in using the 2013 numbers, as the analyst sample sizes are still well below those for 2012, especially when it comes to revenues.

However, the rise in net margins for 2012 and 2013 seems to be more due to very low revenue growth than fast earnings growth.  After posting 8.73% growth in 2011, and 10.90% ex Financials, revenue growth is expected to drop to just 1.39% for 2012 and rebound to only 4.78% in 2013.  Excluding financials, growth is expected to be 3.44% for 2012 and 4.80% for 2013. 

Quite frankly given the recovering economy, the very low rate of revenue growth is surprising.  Weakness in Europe and a somewhat stronger dollar may be playing a role there.  However, I suspect that either the analysts are being overly cautious about their revenue estimates, or the economy might not do as well as people are now expecting.  I suspect it is more the former than the later.

Total net income in 2010 rose to $788.8 billion in 2010, up from $538.6 billion in 2009.  The expectations for the full year are very healthy.  In 2011, the total net income for the S&P 500 should be $891.8 billion, or increases of 44.8% and 15.3%, respectively.  The expectation is for 2012 to have total net income come close to $1 Trillion mark to $975.2 Billion, for growth of 9.4%. followed by growth of 12.5% in 2013.  Total net income is expected to finally pass the $1 Trillion mark in 2013 at $1.098 Trillion.  

The “EPS” for the S&P 500 is expected to be over the $100 “per share” level for the first time at $103.47 in 2012.   That is up from $56.79 for 2009, $81.12 for 2010, and $94.63 for 2011.  For 2013, the S&P 500 is expected to earn $116.45.  In an environment where the 10 year T-note is yielding 1.97%, a P/E of 14.5x based on 2011 and 13.3x based on 2012 earnings looks attractive.  The P/E based on 2013 earnings is just 11.8x.  

Estimate revisions activity is past its seasonal peak. And starting to decline rapidly.  In previous earnings seasons we have generally seen a bounce in the revisions ratio, as the analysts have reacted to better than expected earnings and the outlooks on the conference calls.  We finally have some evidence of that, but not much and it comes more from old estimate cuts falling out of the moving four week total, than from new estimate increases being made. 

The revisions ratio for FY1, which is mostly 2012 earnings now stands at 0.91.  The picture for FY2, or mostly 2013 is only slightly better, with a revisions ratio of just 0.99. The ratio of firms with rising mean estimates to falling mean estimates, which now stand at 0.91 and 0.92, respectively. .  

As the earnings season has progressed, things have been getting a bit better, but only moved the season from being very poor to mediocre.   This is happening when the bar is set at its lowest point in a very long time.  For the remaining firms, the bar is set even lower.  

The market has been off to a very strong start of the year, despite the weak early results.  Valuations are still compelling, if somewhat less so than a few months ago.  While earnings growth is slowing, it is still positive.  The numbers for the first quarter look like they could be a little weak. With a decline of 2.25% year over year expected. For the full year, growth of 9.36% is not all that bad, especially with it expected to pick back up again to 12.54% in 2013.


Income Surprises

  • So far 492 firms, or 98.4% have reported fourth quarter results.  Total Income Growth at a 5.64%. We have a 2.27 surprise ratio, and 2.27% median surprise, both weaker than normal, but better than last week. Positive Surprises for 62.4% of all firms reporting.
  • Positive year over year growth for 295, falling EPS for 168 firms, 1.76 ratio, 63.2% of all firms reporting have higher EPS than last year.
  • Eleven sectors are done, others just one or two left. Provided remaining firms report in line, 99.6% of total earnings for quarter in.
  • Aerospace leads by wide margin, Discretionary and Tech also strong.  Utilities, Materials and Transports lag.
  • Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%.  Pay attention to the percent reporting in evaluating the significance of the sector numbers, and probability of a significant change when season is over.

Scorecard & Earnings Surprise 4Q Reported
Income Surprises Yr/Yr
Growth
%
Reported
Surprise
Median
EPS
Surp
Pos
EPS
Surp
Neg
#
Grow
Pos
#
Grow
Neg
Aerospace 9.61% 100.00% 10.12 8 0 5 4
Consumer Discretionary 12.36% 96.67% 4.76 22 4 18 10
Computer and Tech 13.42% 100.00% 3.70 49 18 34 35
Construction 61.88% 100.00% 3.57 6 4 8 3
Conglomerates -7.24% 100.00% 3.45 7 0 7 1
Consumer Staples 5.13% 97.30% 3.11 26 4 24 12
Auto 4.07% 100.00% 3.10 5 3 7 1
Oils and Energy 9.42% 100.00% 2.75 24 15 27 15
Business Service 14.09% 94.74% 2.38 14 1 16 2
Medical 3.42% 100.00% 2.11 29 9 29 16
Retail/Wholesale 1.69% 91.67% 1.40 27 9 29 14
Utilities -9.20% 100.00% 1.32 22 17 24 17
Finance 2.93% 100.00% 1.23 43 29 45 32
Industrial Products 16.85% 95.45% 0.95 11 9 16 5
Basic Materials -19.36% 100.00% 0.00 10 9 13 10
Transportation 17.15% 100.00% 0.00 4 4 7 2
S&P 500 5.64% 98.40% 2.27 307 135 309 179


Sales Surprises
  • Revenue growth of 5.53% among the 492 that have reported, median surprise 0.19 (weak), surprise ratio of 1.19 (weak).  Positive surprise for 53.9%.  
  • Growing Revenues outnumber falling revenues by ratio of 2.86 (solid), 73.8% have higher sales than last year.
  • A weak start to the season, but improving as it wears on.
  • Energy, Auto, and Construction lead, Utilities, Aerospace and Transports lag.
  • Six sectors reporting more sales disappointments than positive surprises.

Sales Surprises 4Q Reported
Sales Surprises Yr/Yr
Growth
%
Reported
Surprise
Median
Sales
Surp
Pos
Sales
Surp
Neg
#
Grow
Pos
#
Grow
Neg
Oils and Energy 13.09% 100.00% 2.084 29 12 39 3
Auto 11.31% 100.00% 1.15 4 4 8 0
Construction 11.66% 100.00% 0.761 6 5 9 2
Retail/Wholesale 7.30% 91.67% 0.485 28 15 39 5
Medical 5.10% 100.00% 0.46 29 16 40 5
Basic Materials 7.74% 100.00% 0.41 12 11 21 2
Computer and Tech 10.88% 100.00% 0.343 42 28 43 26
Business Service 8.83% 94.74% 0.263 11 7 17 1
Finance -10.22% 100.00% 0.175 44 32 44 34
Industrial Products 12.86% 95.45% 0.146 11 10 18 3
Consumer Staples 4.47% 97.30% -0.073 17 19 28 8
Consumer Discretionary 10.82% 96.67% -0.69 11 18 22 7
Conglomerates -2.05% 100.00% -0.82 2 6 5 3
Transportation 10.59% 100.00% -1.09 2 7 8 1
Aerospace 0.78% 100.00% -2.054 3 6 3 6
Utilities 4.36% 100.00% -7.895 14 26 19 21
S&P 500 5.53% 98.40% 0.188 265 222 363 127


Reported Quarterly Growth: Total Net Income
  • The total net income for the 492 that have reported so far is 5.64% above what was reported in the fourth quarter of 2010, down sharply from 14.89% growth the same 492 firms reported in the third quarter.  Excluding Financials, net income up 6.15%, down from 17.76% growth reported in the third quarter.
  • Sequential earnings fall 2.25% for the 492 that have reported, down 2.06% ex Financials.
  • Growth (for the 492 firms) to fall to -2.25% in the first quarter, and -2.06% ex Financials.
  • Total net income reported (492 firms) $233.0 billion, vs. $220.6 billion year ago, but down from $241.4 billion in third quarter.  Final growth projected to be just 5.61%, down from 5.63% last week.  Now have 99.6% of expected net income in.  
  • With so few left, we omit the expected income, sales and margin tables this week.

Quarterly Growth: Total Net Income Reported
Income Growth "Sequential Q1/Q4 E" "Sequential Q4/Q3 A" Year over Year 4Q 11 A Year over Year 1Q 12 E Year over Year 3Q 11 A
Construction -42.83% -16.52% 61.88% 74.48% 60.64%
Transportation -17.61% 3.37% 17.15% 19.22% 13.19%
Industrial Products 6.26% -11.11% 16.85% 6.10% 27.67%
Business Service -7.27% 6.55% 14.09% 14.82% 21.98%
Computer and Tech -20.77% 22.52% 13.42% 1.65% 9.51%
Consumer Discretionary -29.31% 0.80% 12.36% 0.63% 13.20%
Aerospace -24.88% 6.63% 9.61% -0.18% 12.44%
Oils and Energy 3.18% -20.06% 9.42% -5.14% 59.31%
Consumer Staples -15.59% -5.57% 5.13% -2.72% 6.31%
Auto 26.36% -36.53% 4.07% -26.35% 22.75%
Medical 2.97% -6.99% 3.42% -3.12% 6.94%
Finance 10.19% -0.94% 2.93% -3.14% 1.07%
Retail/Wholesale -18.56% 25.27% 1.69% 0.31% 7.76%
Conglomerates -11.79% 1.65% -7.24% 5.15% 16.20%
Utilities 27.45% -41.91% -9.20% -7.69% 9.30%
Basic Materials 50.91% -30.24% -19.36% -15.59% 33.85%
S&P 500 -4.87% -3.22% 5.64% -2.25% 14.89%
Excluding Financial -7.64% -3.63% 6.15% -2.06% 17.76%


Quarterly Growth: Total Revenues Reported
  • Revenue growth (for the 492 that have reported) at 5.53%, down from the 11.30% growth posted in the third quarter.  Growth ex Financials 8.08%, down from 13.20%.
  • Slowdown expected to continue in first quarter, with 7.01% growth, 3.07% ex Financials.
  • Sharp slowdown despite improving U.S. economy, may reflect Europe and the dollar.
  • Sequentially revenues 1.76% higher than in the third quarter, up 2.57% ex Financials.
  • Aerospace Construction and Utilities the only sectors seeing an acceleration in year over year Revenue growth.
  • Finance and Utilities show lower revenues than in the third quarter.

Quarterly Growth: Total Revenues Reported
Sales Growth "Sequential Q1/Q4 E" "Sequential Q4/Q3 A" Year over Year 4Q 11 E Year over Year
1Q 12 E
Year over Year 3Q 11 A
Oils and Energy -6.15% -2.84% 13.09% 4.82% 31.95%
Industrial Products 3.03% -3.81% 12.86% 6.47% 18.38%
Construction -3.71% -1.95% 11.66% 20.10% 8.47%
Auto -4.61% 1.76% 11.31% 7.68% 17.84%
Computer and Tech -8.26% 10.00% 10.88% 16.88% 11.42%
Consumer Discretionary -8.02% 3.44% 10.82% 18.51% 15.06%
Transportation -0.99% 1.05% 10.59% 11.90% 12.69%
Business Service -6.11% 4.20% 8.83% 11.92% 12.67%
Basic Materials 4.73% -3.26% 7.74% 0.62% 19.54%
Retail/Wholesale -5.63% 8.22% 7.30% 11.74% 8.32%
Medical -2.78% 2.44% 5.10% 5.01% 7.02%
Consumer Staples -17.97% 0.90% 4.47% 13.32% 10.98%
Utilities 6.78% -4.29% 4.36% -0.72% 2.62%
Aerospace -8.79% 6.20% 0.78% 15.57% -1.04%
Conglomerates -6.85% 3.43% -2.05% 4.95% 5.64%
Finance -13.02% -3.83% -10.22% -5.57% -0.43%
S&P 500 -6.16% 1.76% 5.53% 7.01% 11.30%
Excluding Financial -5.24% 2.57% 8.08% 3.07% 13.20%


Quarterly Net Margins Reported
  • Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector.    
  • Net margins for the 467 that have reported rise to 9.01% from 8.98% a year ago, but down from 9.47% in the third quarter.  Net margins ex Financials fall to 8.13% from 8.14% a year ago but down from 8.64% in the third quarter.
  • Final Net Margins will be lower as remaining firms are lower margin businesses but looks like the margin expansion game is getting old.  However, these should be very close to final.
  • Margin expansion has been the key driver behind earnings growth.  Due to seasonality, it is best to compare to a year ago, particularly at the individual company and sector levels.  Mix of companies reporting will lead to big changes in both the reported and expected net margin tables from week to week.

Quarterly: Net Margins Reported
Net Margins Q1 2012 Estimated Q4 2011 Reported Q3 2011 Reported Q2 2011 Reported Q1 2011 Reported 4Q 2010 Reported
Computer and Tech 15.65% 17.89% 16.07% 16.88% 16.30% 17.49%
Business Service 12.96% 12.89% 12.60% 12.19% 11.65% 12.29%
Medical 13.35% 12.50% 13.78% 13.68% 13.96% 12.70%
Finance 13.49% 11.79% 11.33% 9.19% 13.41% 10.63%
Consumer Staples 10.97% 10.57% 11.30% 11.06% 10.39% 10.51%
Consumer Discretionary 8.21% 10.42% 10.74% 9.65% 8.66% 10.27%
Conglomerates 9.62% 10.14% 10.83% 9.97% 9.04% 8.88%
Transportation 7.40% 8.73% 8.53% 8.43% 6.75% 8.24%
Industrial Products 8.27% 8.06% 8.68% 8.56% 8.55% 7.79%
Oils and Energy 7.91% 7.11% 8.68% 8.54% 8.07% 7.35%
Aerospace 5.99% 7.06% 7.03% 6.88% 6.14% 6.49%
Utilities 7.21% 5.75% 9.76% 8.37% 8.17% 6.78%
Basic Materials 7.87% 5.27% 7.38% 9.17% 9.69% 7.13%
Retail/Wholesale 3.26% 3.79% 3.19% 3.48% 3.46% 4.03%
Auto 4.79% 3.60% 5.77% 6.62% 6.65% 3.85%
Construction 1.77% 2.95% 3.47% 3.10% 1.16% 2.04%
S&P 500 9.12% 9.01% 9.47% 9.26% 9.49% 8.98%
Excluding Financial 8.06% 8.13% 8.64% 8.68% 8.29% 8.14%


Annual Total Net Income Growth
  • Following rise of just 2.4% in 2009, total earnings for the S&P 500 jumps 44.8% in 2010, 15.3% further expected in 2011.  Growth ex Financials 28.2% in 2010, 17.4% in 2011.
  • For 2012, 9.4% growth expected, 6.6% ex-Financials.  For 2013, 12.5% and 12.1% ex Financials.
  • Fourteen sectors expected to see total net income rise in 2011 and all but Aerospace and Utilities in 2012. Utilities only (small) decliner in 2010.  Eight sectors expected to post double digit growth in 2011 and nine in 2012, 12 in 2013.  Energy, Materials and Health Care expected to grow less than 5% in 2012. Aerospace and Utilities only sectors to decline.  Slow growers in 2011 to be high growers in 2012.
  • Cyclical/Commodity sectors lead in earnings growth in 2011.  Materials, Industrials and Energy expected to grow over 30% for second year.
  • Sector dispersion of earnings growth narrows dramatically between 2010 and 2012, only Construction and Financials (low base) expected to grow more than 20% in 2012, eight grew more than 30% in 2010.  

Annual Total Net Income Growth
Net Income Growth 2010 2011 2012 2013
Construction 585.14% -4.55% 32.30% 40.18%
Finance 311.09% 4.58% 25.12% 14.77%
Transportation 80.42% -3.17% 18.04% 14.62%
Conglomerates 11.11% 6.94% 15.53% 13.80%
Industrial Products 36.44% 37.24% 14.09% 14.42%
Business Service 13.59% 18.30% 13.84% 13.66%
Consumer Discretionary 22.96% 20.09% 12.26% 15.87%
Computer and Tech 47.19% 22.65% 12.02% 12.79%
Retail/Wholesale 14.85% 11.36% 10.82% 13.62%
Auto 1458.33% 6.80% 6.60% 17.88%
Consumer Staples 11.62% 9.25% 5.08% 9.74%
Basic Materials 56.33% 30.52% 4.49% 18.45%
Medical 10.33% 8.14% 1.96% 6.72%
Oils and Energy 51.04% 35.92% 0.62% 11.82%
Aerospace 21.79% 11.55% -3.09% 11.87%
Utilities -0.64% 4.46% -4.06% 9.31%
S&P 500 44.82% 15.28% 9.36% 12.54%


Annual Total Revenue Growth
  • The number of revenue estimates is smaller than earnings estimates, especially for 2013.
  • Total revenues for the S&P 500 expected to rise 8.73% in 2011, 1.39% in 2012, early expectation for 4.78% growth in 2013.
  • Energy, Industrials, Materials and Autos to lead revenue race in 2011.  Three other sectors (all cyclical) also expected to show double digit revenue growth in 2011. Construction leads by wide margin for 2012, Industrials, Transports and Tech also strong.
  • All sectors but Staples, Finance and Aerospace expected to show positive top line growth in 2011.  Thirteen sectors see 2012 growth, all see 2013 growth.
  • Revenue growth significantly different if Financials are excluded, down 10.56% in 2009 but growth of 9.34% in 2010, 10.90% in 2011, and 3.34% in 2012.  Early expectation for 4.80% growth in 2013.

Annual Total Revenue Growth
Sales Growth 2010 2011 2012 2013
Construction 0.47% 4.19% 10.24% 10.34%
Industrial Products 12.34% 19.87% 9.07% 6.78%
Transportation 10.70% 12.60% 7.72% 6.97%
Computer and Tech 15.51% 13.75% 7.58% 7.92%
Basic Materials 10.76% 18.24% 7.02% 6.12%
Retail/Wholesale 4.10% 6.62% 6.33% 4.75%
Consumer Discretionary 5.30% 12.24% 5.37% 4.84%
Utilities 2.13% 3.63% 4.46% 3.07%
Conglomerates 0.94% 3.68% 4.16% 6.48%
Aerospace -0.34% -1.05% 3.88% 2.63%
Business Service 4.81% 9.42% 3.65% 5.28%
Auto 9.21% 18.33% 2.07% 6.79%
Medical 11.40% 5.57% 0.69% 2.92%
Oils and Energy 24.11% 21.74% -0.83% 3.10%
Consumer Staples 4.79% 7.44% -5.80% 3.86%
Finance 0.07% -3.15% -13.03% 4.64%
S&P 500 7.99% 8.93% 1.39% 4.78%
Excluding Financial 9.34% 10.90% 3.44% 4.80%


Annual Net Margins
  • Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.34% for 2010, 8.82% expected for 2011.  Trend expected to continue into 2012 with net margins of 9.52% expected.   Rise to 10.22% expected for 2013.
  • Financials significantly distort overall net margins. Net margins ex financials 7.78% in 2008, 6.93% in 2009, 8.09% for 2010, 8.56% expected in 2011.  Expected to rise to 8.82% in 2012, then to 9.44% in 2013.  
  • Financials net margins soar from -8.42% in 2008 to15.33% expected for 2012, 16.81% for 2013.  As much from revenue weakness as earnings strength.
  • All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009.  Fourteen sectors expected to post higher net margins in 2011 than in 2010.  Thirteen sectors expected to see margin expansion in 2012.  All sectors see expansion in 2013.
  • Sector net margins are calculated as total net income for sector divided by total revenues.  However, there are generally fewer revenue estimates than earnings estimates for individual companies.

Annual Net Margins
Net Margins 2010A 2011A 2012E 2013E
Computer and Tech 14.90% 16.07% 16.73% 17.49%
Finance 9.87% 10.66% 15.33% 16.81%
Medical 12.68% 12.99% 13.15% 13.63%
Business Service 10.77% 11.64% 12.79% 13.80%
Consumer Staples 10.27% 10.44% 11.65% 12.31%
Conglomerates 9.01% 9.30% 10.31% 11.02%
Consumer Discretionary 8.42% 9.01% 9.59% 10.60%
Industrial Products 7.33% 8.39% 8.78% 9.41%
Transportation 9.25% 7.96% 8.72% 9.34%
Oils and Energy 7.15% 7.98% 8.10% 8.79%
Basic Materials 7.08% 7.82% 7.63% 8.52%
Utilities 7.89% 7.95% 7.30% 7.75%
Aerospace 5.83% 6.58% 6.13% 6.69%
Auto 5.23% 4.72% 4.93% 5.44%
Retail/Wholesale 3.27% 3.41% 3.55% 3.86%
Construction 2.65% 2.66% 3.19% 4.05%
S&P 500 8.34% 8.82% 9.52% 10.22%
Excluding Financial 8.09% 8.56% 8.82% 9.44%


Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2012
  • Revisions ratio for full S&P 500 at 0.91, up from 0.79, now neutral.  Total revisions activity past seasonal peak and falling.
  • Conglomerates lead, Business Service also strong, both with increases per cut or more.  Utilities, Transports very weak.
  • Ratio of firms with rising to falling mean estimates at 0.91, up from 0.71, now a neutral reading.
  • Total number of revisions (4-week total) near seasonal peak at 3,401, down from 4,585 last week (-25.8%).  Increases at 1,617, down from 1,853 (-12.7%), cuts at 1,784 down from 2,352 (-24.1%).

The Zacks Revisions Ratio: 2012
Sector %Ch
Curr Fiscal Yr
Est - 4 wks
#
Firms
Up
#
Firms
Down
#
Ests
Up
#
Ests
Down
Revisions
Ratio
Firms
up/down
Conglomerates -0.11 3 3 8 1 8.00 1.00
Business Service 0.9 11 3 111 27 4.11 3.67
Auto -2.79 5 3 33 16 2.06 1.67
Industrial Products -0.39 11 7 45 30 1.50 1.57
Retail/Wholesale -0.61 28 17 285 196 1.45 1.65
Computer and Tech -0.84 34 21 219 187 1.17 1.62
Consumer Discretionary -0.81 17 12 159 140 1.14 1.42
Construction 0.66 3 6 33 34 0.97 0.50
Consumer Staples -0.51 17 18 122 126 0.97 0.94
Medical -0.53 17 24 135 182 0.74 0.71
Finance -0.68 30 44 186 281 0.66 0.68
Oils and Energy -1.61 20 21 158 257 0.61 0.95
Aerospace -0.38 3 5 12 20 0.60 0.60
Basic Materials -1.27 7 15 43 77 0.56 0.47
Utilities -2.56 8 32 58 161 0.36 0.25
Transportation -0.84 2 7 10 49 0.20 0.29
S&P 500 -0.86 216 238 1617 1784 0.91 0.91


Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2013
  • Revisions ratio for full S&P 500 at 0.99 up from 0.88, in neutral territory.
  • Eight sectors have positive revisions ratios (at or above 1.0).  Utilities and Transports very weak, have more than two cuts per increase.
  • Ratio of firms with rising estimate to falling mean estimates at 0.92, up from 0.75.  Still in bearish territory.
  • Total number of revisions (4 week total) at 2,306, down from 2,777 (-17.0%).    
  • Increases at 1,146 down from1,229 last week (-6.8%), cuts at 1,160, down from 1,478 (-21.5%).

The Zacks Revisions Ratio: 2013
Sector %Ch
Next Fiscal Yr Est - 4 wks
#
Firms Up
#
Firms Down
#
Ests Up
#
Ests Down
Revisions
Ratio
Firms up/down
Conglomerates 0.49 5 1 11 2 5.50 5.00
Business Service 0.60 8 5 64 14 4.57 1.60
Auto -0.99 4 4 21 8 2.63 1.00
Industrial Products -0.37 10 8 43 22 1.95 1.25
Retail/Wholesale -0.39 23 19 159 103 1.54 1.21
Computer and Tech -0.66 30 24 143 133 1.08 1.25
Consumer Discretionary -1.28 14 15 96 91 1.05 0.93
Aerospace 0.34 3 6 12 12 1.00 0.50
Basic Materials 0.21 11 10 42 43 0.98 1.10
Consumer Staples -0.09 19 16 87 92 0.95 1.19
Finance -0.28 36 37 171 182 0.94 0.97
Medical -0.44 17 26 112 144 0.78 0.65
Construction -1.30 5 4 13 18 0.72 1.25
Oils and Energy -1.94 14 28 119 171 0.70 0.50
Utilities -2.01 14 25 44 89 0.49 0.56
Transportation -0.93 3 6 9 36 0.25 0.50
S&P 500 -0.66 216 234 1146 1160 0.99 0.92


Total Income and Share
  • S&P 500 earned $538.6 billion in 2009, rising to earn $788.8 billion in 2010, $891.95 billion expected in 2011.  Earnings to approach the $1 trillion mark in 2012 at $975.2 billion, pass in 2013 at $1.097 trillion.
  •  Finance share of total earnings moves from 5.9% in 2009 to 17.3% in 2010, dip to 15.2% expected for 2011; rebound to 17.2% then slip to 16.5% in 2013.  Energy share also rising going from 11.9% in 2009 to 14.6% in 2011, dip to 13.4% in 2012, 13.4% in 2013.
  • Medical share of total earnings exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 10.6% in 2013, down each year.
  • Market Cap shares of Construction, Staples, Retail, Transportation and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2013.
  • Earnings shares of Energy, Finance, Autos and Medical well above market cap shares.
  • As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also overweight sectors where earnings shares exceed market cap shares.

Total Income and Share
Income ($ Bill) Total
Net
Income
$ 2011
Total
Net
Income
$ 2012
Total
Net
Income
$ 2013
% Total
S&P Earn
2011
% Total
S&P Earn
2012
% Total
S&P
Earn
2013
% Total
S&P Mkt
Cap
Computer and Tech $165,002 $184,837 $208,483 18.50% 18.95% 19.00% 19.50%
Finance $134,214 $167,930 $192,740 15.05% 17.22% 17.56% 14.34%
Oils and Energy $130,262 $131,073 $146,562 14.61% 13.44% 13.35% 11.47%
Medical $106,555 $108,639 $115,943 11.95% 11.14% 10.56% 10.25%
Consumer Staples $67,886 $71,333 $78,282 7.61% 7.31% 7.13% 8.63%
Retail/Wholesale $64,260 $71,211 $80,910 7.21% 7.30% 7.37% 9.07%
Utilities $50,276 $48,232 $52,723 5.64% 4.95% 4.80% 5.87%
Conglomerates $29,558 $34,149 $38,861 3.31% 3.50% 3.54% 3.56%
Consumer Discretionary $29,914 $33,580 $38,909 3.35% 3.44% 3.55% 3.96%
Basic Materials $31,478 $32,892 $38,959 3.53% 3.37% 3.55% 3.35%
Industrial Products $22,704 $25,903 $29,637 2.55% 2.66% 2.70% 2.65%
Business Service $16,669 $18,977 $21,569 1.87% 1.95% 1.97% 2.52%
Transportation $13,773 $16,258 $18,635 1.54% 1.67% 1.70% 1.79%
Aerospace $15,042 $14,578 $16,309 1.69% 1.49% 1.49% 1.38%
Auto $12,159 $12,961 $15,278 1.36% 1.33% 1.39% 1.11%
Construction $2,001 $2,647 $3,711 0.22% 0.27% 0.34% 0.55%
S&P 500 $891,754 $975,201 $1,097,509 100.00% 100.00% 100.00% 100.00%


P/E Ratios
  • Trading at 16.74 2010, 14.52 2011 earnings, or earnings yields of 5.97% and 6.89%, respectively.   P/E for 2012 at 13.28x or earnings yield of 7.53%.  Very preliminary 2013 P/E of 11.80, or earnings yield of 8.47%.
  • Earnings Yields still attractive relative to 10-year T-note rate of 1.97% and 30-year bond rate of 3.11.
  • No single-digit P/E sectors for 2012, Autos, Oil and Finance cheapest for 2012 and 2013.
  • Construction has highest P/E for all four years by wide margin.
  • S&P 500 earned $56.79 in 2009 rising to $81.122010.  Currently expected to earn $94.63 in 2011 and $103.47or 2012.  Preliminary 2013 estimate $116.45.

P/E Ratios
P/E 2010 2011 2012 2013
Finance 14.48 13.84 11.06 9.64
Auto 12.62 11.82 11.08 9.40
Oils and Energy 15.50 11.40 11.33 10.14
Medical 13.48 12.47 12.23 11.46
Aerospace 13.28 11.90 12.28 10.98
Basic Materials 17.97 13.77 13.18 11.12
Industrial Products 20.73 15.10 13.24 11.57
Conglomerates 16.67 15.59 13.50 11.86
Computer and Tech 18.77 15.30 13.66 12.11
Transportation 16.26 16.79 14.23 12.41
Consumer Discretionary 20.57 17.13 15.26 13.17
Consumer Staples 18.00 16.47 15.68 14.28
Utilities 15.81 15.13 15.77 14.43
Retail/Wholesale 20.35 18.27 16.49 14.51
Business Service 23.20 19.61 17.23 15.16
Construction 37.41 35.79 27.05 19.30
S&P 500 16.74 14.52 13.28 11.80


Data in this report, unless stated otherwise, is through the close on Thursday 3/01/2012.

We use the convention of referring to the next full fiscal year to be completed as 2011, not all firms are on December fiscal years. This can cause discontinuities in the data.  The data is based on FY1, not based on 2011, even though I may call it 2011 in the report. All numbers, including historical ones, reflect the current composition of the S&P 500, thus some historical numbers may differ from those reported by S&P which are based on the composition of the index at the time of the reports.

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