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Earnings Preview

The Q2 earnings season is effectively over, with results from 451 S&P 500 companies, accounting for almost 91.9% of the index’s total market capitalization, already out (as of Friday, August 9th). We have already seen Q2 reports from 9 of the 16 Zacks sectors, including Finance, Energy, Basic Materials, and Utilities.

This week brings in reports from a total of 126 companies, including 13 S&P 500 members. The Retail sector, which typically has non-calendar quarter ending periods, has the most number of companies still to report Q2 results. In fact, 47% of the S&P 500 companies whose results are still awaited belong to the Retail sector. This week’s line-up of reports has a heavy Retail sector representation, with Wal-Mart (WMT), Macy’s (M), Nordstrom (JWN - Analyst Report), and Kohl’s (KSS - Analyst Report) reporting results. Other notable companies reporting this week include Cisco (CSCO - Analyst Report) and Deere (DE - Analyst Report).  

With the bulk of the Q2 earnings season now behind us, we are in a good position to judge the health of corporate earnings.

Looking at the aggregate growth rates, beat ratios, and median surprises, the Q2 earnings season isn’t materially different from what we saw in Q1 and over the last few earnings seasons. While we had graded the Q1 earnings season as between ‘average’ and ‘below average’, the Q2 earnings season appears to be tracking better than Q1 on improved revenue surprises.

But before buying into the not-so-bad earnings narrative, we should keep in mind that strong numbers from the Finance sector are playing an outsized role in giving respectability to the aggregate earnings picture. One could dispute the legitimacy of the strength in Finance earnings given the not-so-small contribution of reserve releases to the sector’s earnings performance. But even keeping this issue aside, there is no dispute about the broad weakness outside of the Finance sector.

Given this broad-based growth weakness, I would give the Q2 earnings season a ‘below average’ grade, even though total earnings for the quarter will likely reach a new all-time record.

The Q2 Earnings Scorecard

Total earnings for the 451 S&P 500 companies that have reported results already are up +3%, with 66.3% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 451 companies up +2.1% and 55% beating revenue expectations.

The earnings growth rate of +3% compares to +2.6% earnings growth rate in Q1 and the 4-quarter average growth pace of +2.8% for the same set of 451 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, has caught on with historical levels. On the revenue side, the growth of +2.1% compares to +1.9% in Q1 and the 4-quarter average of +2.9% for this group of 451 S&P 500 companies. The revenue beat ratio of 55%, however, is decidedly better than what we saw in Q1 (43.9%) and the 4-quarter average (48.1%).

Strong results from the Finance sector are playing a big role in keeping the aggregate Q2 data in the not-so-bad category. It is very hard to be satisfied with the picture once Finance is excluded from the numbers. With all of the Finance sector’s results already in, total earnings for the sector are up +30% on +8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance’s performance has been way better than what we have seen from the group in recent quarters.

Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks  like J.P. Morgan (JPM), Bank of America (BAC), Key Corp (KEY - Analyst Report) and alone accounts for more than 40% of the sector’s total earnings, were up +8.4% from the same period last year. Total earnings for the Major Banks still remained below the group’s record tally in Q1. The insurance industry, the second largest contributor to Finance sector earnings, had to deal with tough comparisons, resulting in negative growth in Q2. The brokerage firms benefited from easier comps, with total earnings for the Brokerage/Investment Management industry up +16%.

Not So Good Outside Finance   

Strip out Finance from the reports that have come out already and total earnings growth turns negative – down -2.9%. This is weaker than what these same companies reported in Q1. Weakness in the Technology sector spotlights the broad growth challenge outside of Finance, though Basic Materials (total earnings down -11.1%) and Energy (-12.7%) also played roles.

Total earnings for the 87.2% of Tech sector market cap that has reported already are down -10.3% on +1.5% higher revenues, the weakest performance from the sector in a while. Technology is a big area, ranging from hardware makers like Apple (AAPL) and Dell (DELL) to software vendors like Adobe (ADBE - Analyst Report) and Microsoft (MSFT - Analyst Report) and chipmakers like Intel (INTC - Analyst Report). The hardware and software industries individually bring in roughly 45% and 35% of the Technology sectors total quarterly earnings. In Q2, the modestly positive growth for the software industry was more than offset by weakness at the hardware vendors, with total earnings for the Computer & Office Equipment industry down -6.2% from the same period last year.   

The composite Q2 growth rate, where we combine the results for the 451 that have come out with the 49 still to come, is for +2.6% total earnings growth on +2.2% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of -2.8%. Bottom line, the earnings picture outside of Finance is very weak.

High Expectations for Second half & Next year

The predominant negative tone of company guidance has started showing up in expectations for Q3 and the second half of the year. As a result, full-year 2013 earnings growth expectations have come down despite the typical positive earnings season outperformance in Q2. The recent downtrend in estimates notwithstanding, there is still plenty of room for estimates to come down.  

The chart below plots the current Q3 and Q4 growth expectations in the context of where growth has been over the last few quarters. The current +2.5% expected growth rate in Q3 is down from +3% last week and +5.2% in early July.

 

The chart below looks at the same data as is in the chart above, but takes Finance out of the numbers. As you can see, a lot of the expected growth in the second half of the year is from sectors outside of the Finance sector.
 


Given what we have seen thus far in Q2 and in the last few quarters from sectors outside of Finance (above chart), it doesn’t seem reasonable to expect a strong growth ramp up later this year. What this means is that we will see further acceleration in negative estimate revisions in the coming weeks as companies guide lower towards Q3 and beyond.  

Monday-8/12

  • Nothing major on the economic calendar.
  • Sysco Corp (SYY) is the only major earnings report in the morning, while China’s Sina Corp (SINA) will report after the close.

Tuesday -8/13

  • We will get the July Retail Sales numbers in the morning, with expectations +0.4% ‘headline’ growth.
  • Valspar (VAL - Analyst Report) is the only notable report in the morning, while JDS Uniphase (JDSU), will report after the close.

 Wednesday-8/14

  • We will get the July PPI in the morning, with expectations of +0.5% increase on the ‘headline’ and +0.2% on the ‘core’.
  • Deere (DE - Analyst Report) and Macy’s (M) are the notable companies reporting in the morning, while Cisco (CSCO - Analyst Report), Agilent (A) and NetApp (NTAP) will report after the close.
  • Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of earnings surprises, is showing Deere and Agilent coming out with positive earnings surprrises.  
  • To better understand Zacks ESP report, please click here
  • For more details on Zacks Earnings ESP, please check this video. Click here

Thursday -8/15

  • A busy day on the economic calendar, as in addition to weekly Jobless Claims, we will get the July Industrial Production and August Philly Fed and Empire State Fed regional Fed surveys. Also coming out is the August homebuilder sentiment survey.
  • Wal-Mart (WMT), Kohl’s (KSS - Analyst Report), Este Lauder (EL) are some of the notable names reporting in the morning, while Nordstrom (JWN - Analyst Report) and Applied Materials (AMAT - Analyst Report) will report after the close.  

Friday-8/16

  • We will get the July Housing Starts number in the morning, with expectations of strong gains both on Starts as well as permits.
  • Nothing major on the economic calendar.
  • Renesola (SOL) is the only notable company reporting results today.

Here is a list of the 126 companies reporting this week, including 13 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
SYSCO CORP SYY 0.55 0.53 16.67 Monday BTO
ACELRX PHARMACT ACRX -0.25 -0.35 -30.77 Monday AMC
ADV PHOTONIX -A API -0.02 -0.02 33.33 Monday AMC
ALIMERA SCIENCE ALIM -0.23 -0.15 -8 Monday AMC
ATLAS FINL HLDG AFH 0.14 0.05 0 Monday AMC
BIODEL INC BIOD -0.37 -0.45 9.76 Monday AMC
CERAGON NETWRKS CRNT -0.19 0.06 -30 Monday BTO
CHEMOCENTRYX CCXI -0.29 -0.3 -3.7 Monday AMC
CONSOLTD WATER CWCO 0.03 0.13 73.33 Monday BTO
CTI INDUSTRIES CTIB 0.03 -0.02 300 Monday BTO
DERMA SCIENCES DSCI -0.42 -0.23 0 Monday BTO
ENGILITY HLDGS EGL 0.78 0.93 -11.24 Monday AMC
EUROSEAS LTD ESEA -0.06 -0.04 -100 Monday AMC
FABRINET FN 0.26 0.29 3.7 Monday AMC
FORTEGA FIN CP FRF 0.2 0.2 -27.27 Monday AMC
FORTUNA SILVER FSM 0.04 0.11 -28.57 Monday N/A
GOL LINHAS-ADR GOL -0.28 -1.32 -1200 Monday AMC
GOLDEN STAR RES GSS -0.04 0.01 -250 Monday BTO
HOME INNS&HOTEL HMIN 0.35 0.24 83.33 Monday AMC
IAMGOLD CORP IAG 0.09 0.2 7.14 Monday AMC
INTEROIL CORP IOC -0.06 0.16 161.54 Monday AMC
LAKE SHORE GOLD LSG -0.01 0 N/A Monday AMC
NETQIN MOBILE NQ 0.08 0.04 -16.67 Monday AMC
PERION NETWORK PERI 0.3 0.17 20 Monday BTO
PHOENIX NEW MED FENG 0.06 0.07 60 Monday AMC
RELM WIRELESS RWC 0.06 0.09 50 Monday AMC
SCIENTIFIC LRNG SCIL -0.01 -0.14 42.86 Monday AMC
SINA CORP SINA -0.01 -0.01 45.45 Monday AMC
SPIRIT AEROSYS SPR 0.21 0.55 29.79 Monday BTO
STARTEK INC SRT -0.09 -0.26 -314.29 Monday BTO
TEKMIRA PHARMAC TKMR -0.24 -0.19 -28.57 Monday AMC
TOWER GRP INTL TWGP 0.49 -0.34 5.66 Monday AMC
WUXI PHARMATECH WX 0.34 0.28 11.11 Monday AMC
JDS UNIPHASE CP JDSU 0.08 0.1 -33.33 Tuesday AMC
ALPHA&OMEGA SEM AOSL -0.22 0.26 7.69 Tuesday AMC
AMER MIDSTREAM AMID -0.02 -0.1 -200 Tuesday AMC
ATHERSYS INC ATHX -0.12 -0.13 -30 Tuesday AMC
AUXILIO INC AUXO 0 -0.01 -100 Tuesday AMC
BROCADE COMM SY BRCD 0.09 0.12 16.67 Tuesday AMC
CACHE INC CACH -0.14 0.08 2.5 Tuesday BTO
CIMATRON LTD CIMT 0.13 0.11 N/A Tuesday BTO
CINEDIGM DIGITL CIDM -0.07 -0.08 9.09 Tuesday AMC
CLEVELAND BIOLB CBLI -0.16 -0.21 17.65 Tuesday BTO
CREE INC CREE 0.3 0.16 0 Tuesday AMC
DOCUMNT SEC SYS DSS -0.04 -0.05 -25 Tuesday AMC
EVOLVING SYSTEM EVOL 0.03 0.2 0 Tuesday AMC
EXONE CO/THE XONE -0.06 -0.4 -100 Tuesday AMC
FIRST MAJESTIC AG 0.1 0.19 -8 Tuesday BTO
FLOWERS FOODS FLO 0.23 0.15 6.98 Tuesday BTO
GENTIUM SPA-ADR GENT 0.02 0.06 175 Tuesday BTO
GLOBALSTAR INC GSAT -0.05 -0.05 28.57 Tuesday AMC
JACK HENRY ASSC JKHY 0.51 0.5 3.92 Tuesday AMC
MILLENNIAL MEDA MM -0.07 -0.03 25 Tuesday AMC
MYRIAD GENETICS MYGN 0.44 0.34 17.95 Tuesday AMC
NETLIST INC NLST -0.13 -0.14 28.57 Tuesday AMC
OCERA THERAPEUT OCRX -0.24 -2.76 -20 Tuesday AMC
PFSWEB INC PFSW -0.16 -0.02 83.33 Tuesday BTO
PHOTRONICS INC PLAB 0.1 0.16 -11.11 Tuesday AMC
PLANET PAYMENT PLPM 0 -0.02 N/A Tuesday AMC
SIMCERE PHARMAC SCR 0.12 0.08 12.5 Tuesday BTO
SUPERNUS PHARMA SUPN -0.67 -0.61 4.76 Tuesday AMC
TEARLAB CORP TEAR -0.13 -0.11 8.33 Tuesday AMC
TREE.COM INC TREE 0.06 -0.14 -52.94 Tuesday AMC
ULTRAPETROL LTD ULTR -0.01 -0.18 100 Tuesday AMC
VALSPAR CORP VAL 1.11 0.97 2.25 Tuesday BTO
ZAIS FINANCIAL ZFC 0.44 1.1 -66.67 Tuesday BTO
AGILENT TECH A 0.62 0.79 14.93 Wednesday AMC
CISCO SYSTEMS CSCO 0.47 0.42 4.44 Wednesday AMC
DEERE & CO DE 2.16 1.98 0.73 Wednesday BTO
MACYS INC M 0.78 0.67 3.77 Wednesday BTO
NETAPP INC NTAP 0.33 0.25 1.85 Wednesday AMC
ADCARE HLTH SYS ADK 0.04 0.07 -57.14 Wednesday N/A
APPLD INDL TECH AIT 0.76 0.75 0 Wednesday BTO
AVIAT NETWORKS AVNW -0.01 0.01 -133.33 Wednesday AMC
BAYTEX ENERGY BTE 0.36 0.43 -112 Wednesday BTO
CACI INTL A CACI 1.61 1.59 -1.82 Wednesday AMC
COPEL-ADR PR B ELP 0.34 0.91 0 Wednesday N/A
CROWN CRAFTS CRWS 0.1 0.09 11.76 Wednesday BTO
FAB UNIVL CP FU 0.15 -0.04 N/A Wednesday BTO
GAFISA SA-ADR GFA 0.17 0 -211.11 Wednesday N/A
GLOBAL SHIP LS GSL 0.11 0.14 -50 Wednesday BTO
GLOBAL TELECOM GTT 0 0 N/A Wednesday BTO
GSE SYSTEMS INC GVP -0.04 0.01 100 Wednesday AMC
HOLLYSYS AUTOMT HOLI 0.43 0.21 0 Wednesday AMC
INTERLEUKIN GEN ILIU -0.02 -0.03 0 Wednesday AMC
JINKOSOLAR HLDG JKS -0.07 -2.11 66.27 Wednesday BTO
JINPAN INTL LTD JST 0.2 0.14 75 Wednesday BTO
LIFEWAY FOODS LWAY 0.14 0.13 55.56 Wednesday AMC
NETEASE INC NTES 1.28 1.05 13.79 Wednesday AMC
OSI SYSTEMS INC OSIS 1.02 0.95 1.37 Wednesday BTO
QUANTUM FUEL SY QTWW -0.24 -0.64 25 Wednesday BTO
RENREN INC-ADR RENN -0.07 -0.06 85.71 Wednesday AMC
SHARPS COMPLIAN SMED -0.04 -0.04 -33.33 Wednesday BTO
SILVER WHEATON SLW 0.27 0.4 -9.76 Wednesday AMC
SPAR GROUP INC SGRP 0.04 0.03 N/A Wednesday BTO
SUMMER INFANT SUMR 0.02 -0.02 200 Wednesday AMC
SYNERON MED LTD ELOS 0.03 0.02 90.91 Wednesday BTO
SYNTHETIC BIOLG SYN -0.06 -0.05 0 Wednesday AMC
TOWERS WATSON TW 1.25 1.2 13.1 Wednesday BTO
TRANSWITCH CORP TXCC -0.07 -0.17 -40 Wednesday AMC
VERTEX ENERGY VTNR 0.05 -0.02 N/A Wednesday N/A
VIPSHOP HOLDNGS VIPS 0.11 -0.11 1100 Wednesday AMC
WIDEPOINT CORP WYY -0.01 -0.01 N/A Wednesday AMC
XUEDA EDUC-ADR XUE 0.23 0.2 -25 Wednesday AMC
APPLD MATLS INC AMAT 0.19 0.24 23.08 Thursday AMC
ESTEE LAUDER EL 0.23 0.17 36.36 Thursday BTO
KOHLS CORP KSS 1.04 1 15.79 Thursday BTO
NORDSTROM INC JWN 0.88 0.75 -3.95 Thursday AMC
PERRIGO COMPANY PRGO 1.56 1.28 -1.39 Thursday BTO
WAL-MART STORES WMT 1.25 1.18 -0.87 Thursday BTO
AEROFLEX HOLDNG ARX 0.21 0.22 10 Thursday BTO
ASPEN TECH INC AZPN 0.05 -0.06 233.33 Thursday AMC
BALLY TECH INC BYI 0.93 0.78 10.71 Thursday AMC
BRIGGS & STRATT BGG 0.19 0.22 -17.59 Thursday BTO
CHINA LODGING HTHT 0.19 0.18 100 Thursday AMC
CHIPMOS TEC LTD IMOS 0.31 0.36 215.38 Thursday BTO
E-COMMRC CH-ADR DANG -0.16 -0.24 21.05 Thursday BTO
G&K SVCS A GK 0.65 0.59 11.29 Thursday BTO
GLOBAL SRCS-LTD GSOL 0.43 0.28 -76.47 Thursday BTO
HIMAX TECH-ADR HIMX 0.11 0.09 14.29 Thursday BTO
IFM INVEST-ADS CTC 0.01 0.01 200 Thursday BTO
PAN AMER SILVER PAAS 0.05 0.04 4 Thursday BTO
RED ROBIN GOURM RRGB 0.66 0.52 1.54 Thursday BTO
RENESOLA LT-ADR SOL -0.26 -0.4 -15.38 Thursday BTO
UNWIRED PLANET UPIP -0.06 -0.08 -88.33 Thursday AMC
E-HOUSE CHINA EJ -0.04 -0.03 89.47 Friday BTO

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