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Earnings Trends

Sheraz Mian

Are Q1 Expectations Too Low?

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Earnings Trends
Zacks Weekly Earnings Overview
(Covers companies in the S&P 500)

 

Note: I was on track to assume this regular weekly piece in the coming weeks to accommodate Dirk Van Dijk’s growing responsibilities within the firm. But his sad and sudden death over the weekend has upended those plans. I’ll try my best to maintain the strong standards established by Dirk, but clearly nobody can replace him.
 
Key Points:

  • First quarter 2012 reporting season getting underway, with growth expectations at their lowest levels since the end of the Great Recession. Given the relatively low hurdle rate, the odds of meaningful negative surprises are low, given lowered expectations.
  • Total Earnings are expected to drop 2% from the year-earlier quarter, the weakest quarterly growth expectation since the end of the Great Recession in mid-2009. Flat revenue growth and modestly down (net income) margins drive the subdued expectations.     
  • Breadth of growth has been decidedly getting weaker, with eight (8) of the sixteen (16) Zacks sectors expected to show negative growth in the quarter. Just like in the fourth quarter of 2011, Basic Materials, Autos, and Utilities are expected to be the weakest performers, while Construction, Business Services and Transportation are expected to be the strongest operators.
  • Weak guidance during the last quarterly results and a flurry of earnings pre-announcements helped bring down expectations for the first quarter. But the extent of negative revisions for the coming quarters and full-year 2012 has been relatively light lately. In fact, the first quarter is expected to emerge as the low point in this year’s growth story, with growth accelerating in the coming quarters.
  • Current expectations for total earnings in the second quarter are for a 5.1% increase, with full-year 2012 expected to see a 9.4% increase. A roughly 2% increase in revenues and a 67 basis-point (bp) expansion in margins are driving the full-year growth expectation. It may be a bit early for 2013, but current expectations peg growth that year at 12.7%, driven by a 4.9% gain in revenues and 71-bp margin expansion. Total net income increased 15.2% in 2011 on the back of an 8.9% increase in revenue and 48 bp margin expansion.
  • The full-year 2012 earnings expectations reflect a pronounced growth ramp-up beyond the first quarter’s low point, with 9 of the 16 Zacks sectors expected to show double-digit gains for the year. Financial services, whose earnings performance in recent quarters has been quite erratic, is expected to assume growth leadership this year, with 25.2% earnings growth. Financial Services earnings increased 4.3% in 2011 and are expected to be down 1% in the first quarter.
  • Margins peaked in the third quarter of 2011 and are expected to keep trending down sequentially through the first quarter. But current earnings estimates for the coming quarters reflect margins will be expected to start going back up, with gains for the full years 2012 and 2013. I consider these margin expectations as the weakest link in current estimates and view them as vulnerable to downward revisions going forward.    


First Quarter Earnings – Are Expectations Too Low?

We will know for sure in the coming days as the reporting season heats up, but with Tech expected to eke out a paltry 2.8% gain and Finance expected to show a 1% decline, it wouldn’t take much to come out ahead of expectations.

But the key likely will not be so much the aggregate growth and surprise numbers as management’s guidance for the coming quarters. As you can see here, expectations for the second quarter and full-year 2012 are not as subdued as they are for the first quarter of 2012.

Estimates will likely come down if management teams turn out to be less than clear about the coming quarters, particularly with respect to the earnings impact from Europe and China.


Growth - Total Net Income
Zacks Sectors 1Q-12E
YoY
1Q-12E
QoQ
2Q-12E
YoY
2Q-12E
QoQ
2011A
YoY
2012E
YoY
2013E
YoY
Construction 62.50% -40.70% 22.20% 118.20% 5 4 4
Business Services 14.80% -6.10% 13.30% 6.80% 18 10 10
Transportation 11.30% -20.40% 13.70% 31.40% 34 35 35
Industrial Products 5.90% -3.90% 14.40% 15.30% 8 3 3
Conglomerates 5.10% 11.80% 7.50% -15.80% 7 1 1
Retail/Wholesale 3.80% -25.50% 3.00% 11.40% 24 12 12
Computer and Tech 2.80% -21.60% 2.70% 7.30% 7 1 1
Consumer Discretionary 2.00% 22.60% 2.90% 7.50% 27 15 15
Aerospace -0.40% -25.00% -7.40% 9.70% 16 2 2
Finance -1.00% 12.80% 46.70% 4.10% 29 16 16
Consumer Staples -2.90% -15.30% -2.00% 20.20% 29 14 14
Medical -4.20% 1.90% -2.70% 2.10% 24 17 17
Oils and Energy -4.80% 4.20% -10.80% 6.90% 45 32 32
Utilities -8.60% 27.70% -7.90% -1.10% 16 5 5
Auto -27.70% 24.10% -20.10% 18.70% 13 10 10
Basic Materials -27.70% 59.00% -10.00% 27.30% 7 2 2
S&P 500 -2.00% -5.30% 5.10% 8.80% 309 179 179
Excluding Financial -2.60% -8.30% -2.00% 9.50% 309 179 179


Revenues Not the Big Driver

Revenue remains essentially flat in the first two quarters of 2012, but is expected to show some signs of life in the back half of the year, mostly through Financial Services and Tech gains.

Growth - Total Revenue
Zacks Sectors 1Q-12E
YoY
1Q-12E
QoQ
2Q-12E
YoY
2Q-12E
QoQ
2012E
YoY
2013E
YoY
Construction 14.10% -3.60% 8.90% 11.50% 10.20% 10.50%
Business Services 4.10% -4.50% 4.00% 3.80% 5.60% 3.00%
Transportation 8.70% -3.50% 6.50% 7.60% 8.00% 8.40%
Industrial Products 4.60% -1.70% 9.50% 12.00% 6.80% 6.20%
Congloms -2.40% -7.00% 4.20% 7.90% 7.60% 7.10%
Retail/Wholesale 6.40% -7.20% 4.50% 2.50% 4.30% 5.50%
Computer and Tech 6.40% -9.60% 5.60% 4.60% 6.40% 4.60%
Consumer Discretionary 4.60% -10.20% 2.90% 4.60% 5.40% 5.00%
Aerospace 5.30% -8.90% 4.50% 4.70% -5.70% 3.70%
Finance -17.60% -12.60% -13.70% 1.30% 9.10% 7.00%
Consumer Staples -7.80% -18.40% -9.30% 9.60% 3.90% 2.70%
Medical 1.90% -2.90% 0.50% 1.10% 0.70% 3.10%
Oils and Energy -2.00% -6.30% -4.20% 5.50% 0.70% 3.40%
Utilities 6.30% 7.30% 3.80% -5.40% -12.80% 4.40%
Auto 2.70% -4.60% 1.20% 6.30% 4.30% 7.10%
Basic Materials 5.20% 5.40% 0.90% 5.50% 2.00% 6.70%
S&P 500 -0.10% -6.80% -0.70% 3.80% 1.80% 4.90%
Excluding Financial 2.70% -6.00% 1.50% 4.10% 3.90% 4.90%


Margins Hold the Key Outlook

Aggregate margins peaked in the third quarter of 2011 and have been trending down in the aggregate since then. Given the flakiness of Financial Sector margins, it is better to exclude them to get a sense for an underlying trend.

The expectation is for a roughly 20 basis-point contraction in ex-Finance margins in the first quarter, but they start trending back up in the coming quarters. Margins for the full year 2012 (excluding Finance) are expected to expand by 20 basis points, with a far more impressive 60 basis-point expansion expected in 2013. With Finance in the mix, this year’s gains increase to 60 basis points and reach a new record by adding further 70 basis points in 2013.

I would view these margin expectations as the weakest link in the earnings outlook going forward and would expect them to be vulnerable to negative revisions.

The Margins Story
Zacks Sectors 2Q-12E 1Q-12E 4Q-11A 3Q-11A 2011A 2012E 2013E
Construction 3.50% 1.80% 2.90% 3.50% 2.70% 3.20% 4.10%
Business Services 8.00% 7.90% 7.10% 8.70% 11.80% 12.70% 13.70%
Transportation 5.20% 4.70% 3.60% 5.80% 8.00% 8.70% 9.30%
Industrial Products 7.70% 6.40% 4.90% 7.10% 8.40% 8.80% 9.40%
Conglomerates 13.10% 13.00% 12.40% 13.60% 9.30% 10.30% 10.90%
Retail/Wholesale 3.60% 3.30% 4.00% 3.40% 3.40% 3.60% 3.90%
Computer and Tech 9.10% 8.90% 8.20% 8.90% 16.00% 16.80% 17.60%
Consumer Discretionary 6.10% 5.80% 7.10% 7.00% 9.00% 9.40% 10.50%
Aerospace 13.20% 12.80% 13.10% 12.50% 6.60% 6.20% 6.70%
Finance 9.40% 9.10% 10.50% 9.30% 10.80% 15.60% 17.10%
Consumer Staples 7.30% 7.00% 6.00% 9.80% 10.50% 11.60% 12.30%
Medical 16.00% 15.60% 17.90% 16.10% 12.90% 13.10% 13.60%
Oils and Energy 12.10% 11.10% 10.70% 11.50% 8.00% 8.00% 8.70%
Utilities 10.40% 9.70% 10.30% 10.40% 8.20% 7.40% 7.80%
Auto 15.40% 15.00% 11.60% 11.20% 4.70% 5.00% 5.50%
Basic Materials 10.10% 8.20% 10.00% 9.80% 7.80% 7.60% 8.50%
S&P 500 9.60% 9.20% 9.00% 9.50% 8.90% 9.50% 10.20%
Excluding Financial 8.90% 8.40% 8.60% 9.20% 8.60% 8.80% 9.40%

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