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Earnings Preview

Q3 Earnings Season Takes the Spotlight

Seems like we can start looking ahead to a life without ‘too much’ Washington distractions. We are not quite there yet, as there is no tangible deal in front of us, but there is growing indication that Congress may be getting ready to extend the debt-ceiling deadline by a few more weeks while they work on the budget related issues. This may sound like nothing more than kicking the can down road, which it is. But given how deadlocked the situation was just a couple of days back, we will call this progress.

Washington will still dominate the headlines, but an extension to the debt-ceiling deadline will remove the default scenario from investors’ minds. This will help the market focus on the 2013 Q3 earnings season which gets into high gear this week with earnings reports from 161 companies come out, including 70 from the S&P 500. By the end of this week, we will have seen earnings reports from more than a fifth of the index’s total membership, giving us a good enough sample size to judge the Q3 earnings season.

This week’s reporting docket is heavy with Finance sector results, but we have plenty of bellwethers from other key sectors on deck as well, which makes this week’s reports a fairly representative sample. From Google (GOOG), IBM , and Intel to Coke and Johnson & Johnson and Pepsi and much more in between, this week’s reports span the full spectrum of the economy. While earnings reports from almost 80% of the S&P 500 companies will still be awaited by the end of the week, the trends established this week will likely carry through the rest of this reporting cycle with only minor changes.

Q3 Earnings Scorecard (as of Friday, 10/11/2013)

Total earnings for the 31 S&P 500 companies that have reported results are up +9.8% with 51.6% beating earnings expectations, while total revenues for these companies are up +1.4% and 45.2% are beating top-line expectations.

This is still early going, but the results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +9.8% earnings growth in Q3 for these companies compares to +18.2% in Q2 and the 4-quarter average of +17.8%, while the +1.4% revenue growth is below Q2 and the 4-quarter’s average of +4.2%. The beat ratios are similarly tracking lower. The weak comparisons are primarily because of the Finance sector. If we exclude results from the Finance sector, the remaining companies that have reported results are tracking better than what those same companies reported in Q2 and the last few quarters.

The J.P. Morgan (JPM) and Wells Fargo (WFC) reports from the Finance sector represent the two largest earnings contributors to the sector’s total. The Q3 earnings from these two companies combined account for 23.2% of all Finance sector earnings this quarter and provide plenty of read through for the companies still to report results. The market appears happier with the JPM report despite the bank’s $9.15 billion litigation charge, increasing the size of its total litigation reserves to an enormous $23 billion. Beyond this charge, there isn’t that much difference in the results of the two companies, though they are admittedly very different from each other in many respects.

In addition to both being huge commercial/retail banks, Wells Fargo has a big mortgage business, while J.P. Morgan is a big capital markets player. We knew that the mortgage business was weakening after the rise in mortgage rates and results from both companies confirmed that. The capital markets business was so so, with some momentum on the equities side, but weakness in fixed income. Loan demand remained tepid and net interest margins were under pressure.

All of these trends are applicable to the companies reporting next week. On the capital markets front, we will see the fixed income weakness in Goldman Sachs’ results, while Morgan Stanley could be a beneficiary of the positive equity markets trading activity. Overall, if the two best run firms in the sector had this quality results, then we probably need to ratchet down our expectations from the others. Total Q3 earnings for the sector are expected to be up +6.8%, with positive earnings growth at the major banks and brokerage industries, partly offset by negative comparisons at the insurance industry.

Low Expectations for Q3

Overall expectations for the quarter remain low, having fallen sharply over the last three months. Total earnings growth for the remaining 469 companies is barely in the positive relative to the same period last year (+0.1%) and in the negative excluding the Finance sector (-1.1%). The composite earnings growth rate, combining results from the 31 companies that have reported with the 469 still to come, is +0.9% for the S&P 500.

Seven of the 16 Zacks sectors are expected to see earnings decline in Q3, including Technology, Energy, and Basic Materials. Earnings in the Tech sector are expected to be down -1.2%, with margin weakness offsetting modest top-line gains. The Office & Computer Equipment industry, which alone account for almost 45% of the Tech sector’s total earnings, will see total earnings decline -7.6% on -0.4% lower revenues. The equipment makers’ weakness offsets modest earnings growth in the Software, Semiconductor, and Telecom Equipment industries.

Earnings in the Energy sector are expected to be down -4.9% in Q3 after the -11.8% decline in Q2. The Energy sector weakness is concentrated in the Integrated industry that alone accounts for more than 60% of the sector’s earnings. Negative comparisons at Exxon , which brings in more than a quarter of the sector’s total earnings, more than offsets positive earnings growth at Chevron and results in the negative growth for the sector.

Predicting Earnings Surprises – Earnings ESP

Earnings ESP, or expected surprise prediction, is our proprietary metric for predicting earnings surprises. This metric, which results from comparing the Zacks Consensus earnings estimate for the company with the most accurate EPS estimate in our database, significantly improves the odds of foretelling positive earnings surprises ahead of time.

Our research shows that for stocks with positive ESP and Zacks Rank # 3 (Hold) or better, the odds of positive earnings surprise is as high as 70%. For more details on Earnings ESP, please check the Earnings ESP page on Zacks.com. Please note that the magnitude of Earnings ESP doesn’t mean that the company’s earnings surprise will be of an equivalent amount.

Here are three Finance sector companies announcing results next week that are expected to come out with earnings beats.

  • Capital One Financial (COF) has a Zacks Rank # 2 (Buy) and positive Earnings ESP of +5.1%. This consumer finance company is expected to report Q3 results on October 17th, with its current Zacks Consensus estimate of $1.75 up from $1.62 three months ago. The stock hasn’t done much over the past month, but a positive surprise could push it higher.
  • Fifth Third Bank (FTIB). This Zacks Rank #3 (Hold) stock will report Q3 results on October 17th. The company’s current Zacks Consensus EPS of $0.44 is up a penny over the past week. The bank’s positive Earnings ESP of +2.3% materially improves the odds that it will come out with an earnings beat; they missed expectations in Q2.
  • Western Alliance Bancorp : This Phoenix, Arizona-based is a $1.65 billion market capitalization bank holding company that currently has a Zacks Rank #2 (Buy) and Earnings ESP of +12.5%. Please note that the +12.5% Earnings ESP doesn’t mean that the expected positive surprise will be of the same magnitude.  The company will report Q3 results on October 17th, with the current Zacks Consensus EPS of $0.32 up 5 cents in the last three months. Western Alliance in the last two quarters and remains on track to repeat that performance this time around as well.

For more companies expected to beat earnings expectations, please check the Earnings ESP Page.  Click here

High Expectations for Q4

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.
 

Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $259.5 billion in Q2, surpassing Q1’s $255 billion record. But they are expected to reach $269.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +4.9%.

The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.

Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.

Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

For a more detailed look at the overall earnings picture, please check out our weekly Earnings Trends report. Click here.

Monday - 10/14

  • The Columbus Day holiday will most likely shutdown the parts of federal government that aren’t already closed.
  • J.B. Hunt Transport (JBH) and Packaging Corp (PKG) are the only notable companies reporting results, both after the close.

Tuesday - 10/15

  • We will get the October Empire State regional manufacturing survey in the morning, with expectations of a modest improvement from the prior 6.3 reading.
  • Citigroup (C), Coca Cola , and Johnson & Johnson are the key earnings reports in the morning, while Intel and Yahoo (YHOO) will report after the close.

Wednesday - 10/16

  • The September CPI data is unlikely to see the light of the day, but the October homebuilder sentiment index will come out and is expected to be down a bit from the prior month’s 58 reading.
  • On a busy earnings day, we will get a host of regional banks and trust companies report results. The notable reports today are from Bank of America (BAC) and Pepsi in the morning and IBM and eBay (EBAY) after the close.

Thursday - 10/17

  • Today is deadline for treasury to run out of money unless they get an extension. The Jobless Claims data will likely still remain ‘polluted’, while the Housing Starts and Industrial Production numbers may not be available.
  • Verizon , Goldman Sachs and Union Pacific are the major earnings reports in the morning, while Google (GOOG) and Chipotle Mexican Grill (CMG) will report after the close.

Friday - 10/18

  • General Electric (GE), Morgan Stanley , Schlumberger , and Baker Hughes (BHI) are the only notable reports today, both in the morning.

Here is a list of the 161 companies reporting this week, including 70 S&P 500 members:
 

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
BROWN & BROWN BRO 0.41 0.34 2.86 Monday AMC
HUNT (JB) TRANS JBHT 0.78 0.65 -1.35 Monday AMC
PACKAGING CORP PKG 0.89 0.55 12.7 Monday AMC
STANLEY FURN CO STLY -0.11 -0.14 -91.67 Monday AMC
WINTRUST FINL WTFC 0.65 0.66 13.11 Monday AMC
CITIGROUP INC C 1.06 1.06 5.93 Tuesday BTO
COCA COLA CO KO 0.53 0.51 0 Tuesday BTO
COMMERCE BANCSH CBSH 0.72 0.71 1.41 Tuesday BTO
CSX CORP CSX 0.43 0.44 10.64 Tuesday AMC
DOMINOS PIZZA DPZ 0.52 0.43 1.79 Tuesday BTO
FIRST REP BK SF FRC 0.65 0.72 1.59 Tuesday BTO
INTEL CORP INTC 0.53 0.6 -2.5 Tuesday AMC
INTERACTIVE BRK IBKR 0.32 0.26 0 Tuesday AMC
JOES JEANS INC JOEZ 0.02 0.02 -33.33 Tuesday AMC
JOHNSON & JOHNS JNJ 1.32 1.25 5.71 Tuesday BTO
LINEAR TEC CORP LLTC 0.45 0.46 7.14 Tuesday AMC
MARTEN TRANS MRTN 0.23 0.19 -8 Tuesday AMC
OMNICOM GRP OMC 0.8 0.74 0 Tuesday BTO
PINNACLE FIN PT PNFP 0.42 0.33 7.69 Tuesday AMC
RENASANT CORP RNST 0.35 0.28 3.13 Tuesday AMC
SCHWAB(CHAS) SCHW 0.2 0.17 -5.26 Tuesday BTO
YAHOO! INC YHOO 0.27 0.35 15.38 Tuesday AMC
ABBOTT LABS ABT 0.52 1.3 4.55 Wednesday BTO
ALBEMARLE CORP ALB 1.08 1.1 -1.01 Wednesday AMC
AMER EXPRESS CO AXP 1.22 1.09 4.96 Wednesday AMC
ASML HOLDING NV ASML 0.69 1.1 4.69 Wednesday BTO
ASTORIA FINL CP AF 0.14 0.15 33.33 Wednesday AMC
BADGER METER BMI 0.61 0.62 -20 Wednesday AMC
BANCO LATINOAME BLX 0.61 0.34 5.56 Wednesday BTO
BANK OF AMER CP BAC 0.18 0 28 Wednesday BTO
BANK OF NY MELL BK 0.58 0.63 6.9 Wednesday BTO
BLACKROCK INC BLK 3.88 3.47 8.64 Wednesday BTO
COHEN&STRS INC CNS 0.4 0.44 -20.93 Wednesday AMC
COMERICA INC CMA 0.71 0.69 8.57 Wednesday BTO
CORE LABS NV CLB 1.34 1.13 -2.27 Wednesday AMC
CROWN HLDGS INC CCK 1.08 1 3.23 Wednesday AMC
EAST WEST BC EWBC 0.54 0.48 1.96 Wednesday AMC
EBAY INC EBAY 0.53 0.49 0 Wednesday AMC
EL PASO PIPELIN EPB 0.47 0.55 -8.51 Wednesday AMC
EXPONENT INC EXPO 0.61 0.72 30.51 Wednesday N/A
GRAINGER W W GWW 3.09 2.81 2.71 Wednesday BTO
HERITAGE-CRYSTL HCCI 0.09 0.06 20 Wednesday AMC
HNI CORP HNI 0.59 0.55 12 Wednesday AMC
INTL BUS MACH IBM 3.96 3.62 3.44 Wednesday AMC
KEYCORP NEW KEY 0.22 0.23 5 Wednesday BTO
KINDER MORG ENG KMP 0.6 0.57 -19.67 Wednesday AMC
KINDER MORG MGT KMR 0.55 N/A 14.55 Wednesday AMC
KINDER MORGAN KMI 0.32 0.19 -12.9 Wednesday AMC
KNOLL INC KNL 0.21 0.26 21.43 Wednesday BTO
LASALLE HTL PRP LHO 0.68 0 0 Wednesday AMC
MATTEL INC MAT 1.1 1.04 -34.38 Wednesday BTO
MGIC INVSTMT CP MTG -0.12 -1.25 118.75 Wednesday BTO
NOBLE CORP NE 0.71 0.45 12.5 Wednesday AMC
NORTHERN TRUST NTRS 0.77 0.73 -6.02 Wednesday BTO
PACIFIC CONTL PCBK 0.21 0.19 0 Wednesday AMC
PEPSICO INC PEP 1.17 1.2 10.08 Wednesday BTO
PIPER JAFFRAY PJC 0.48 0.72 -51.92 Wednesday BTO
PLATINUM UNDRWT PTP 0.97 1.96 26.8 Wednesday AMC
PNC FINL SVC CP PNC 1.62 1.64 21.34 Wednesday BTO
RLI CORP RLI 0.95 1.02 7.63 Wednesday AMC
SANDISK CORP SNDK 1.22 0.42 29.55 Wednesday AMC
SELECT COMFORT SCSS 0.42 0.46 -21.74 Wednesday AMC
SLM CORP SLM 0.59 0.58 47.83 Wednesday AMC
ST JUDE MEDICAL STJ 0.89 0.83 2.13 Wednesday BTO
STANLEY B&D INC SWK 1.38 1.4 0.83 Wednesday BTO
STEEL DYNAMICS STLD 0.24 0.15 0 Wednesday AMC
UMPQUA HLDGS CP UMPQ 0.26 0.22 9.09 Wednesday AMC
UNIVL FST PRODS UFPI 0.54 0.28 9.72 Wednesday AMC
US BANCORP USB 0.76 0.74 0 Wednesday BTO
UTD RENTALS INC URI 1.59 1.35 10.89 Wednesday AMC
WATSCO INC WSO 1.43 1.19 4.96 Wednesday BTO
WESTAMER BANCP WABC 0.64 0.73 -1.54 Wednesday N/A
WNS HLDGS-ADR WNS 0.28 0.21 8.7 Wednesday BTO
XILINX INC XLNX 0.52 0.46 19.15 Wednesday AMC
ADV MICRO DEV AMD 0.02 -0.2 25 Thursday AMC
ALIGN TECH INC ALGN 0.3 0.28 28.57 Thursday AMC
ALLIANCE DATA ADS 2.52 2.18 4.13 Thursday BTO
AMPHENOL CORP-A APH 0.96 0.9 1.06 Thursday BTO
ASSOC BANC CORP ASBC 0.26 0.26 7.69 Thursday AMC
ATHENAHEALTH IN ATHN 0.15 0.18 -425 Thursday AMC
B&G FOODS CL-A BGS 0.4 0.35 -2.94 Thursday AMC
BAXTER INTL BAX 1.19 1.14 2.65 Thursday BTO
BB&T CORP BBT 0.71 0.7 5.48 Thursday BTO
BLACKSTONE GRP BX 0.56 0.55 19.23 Thursday BTO
BOSTON PRIV FIN BPFH 0.19 0.17 -5.26 Thursday AMC
BRIDGE CAP HLDG BBNK 0.27 0.29 -52 Thursday AMC
BRIGGS & STRATT BGG -0.31 -0.28 15.79 Thursday BTO
CAPITAL BNK FIN CBF 0.2 0.12 -4.55 Thursday BTO
CAPITAL ONE FIN COF 1.75 2.03 18.97 Thursday AMC
CEPHEID INC CPHD -0.11 -0.08 -166.67 Thursday AMC
CHIPOTLE MEXICN CMG 2.76 2.27 0 Thursday AMC
COBIZ FINL INC COBZ 0.14 0.14 28.57 Thursday AMC
CYPRESS SEMICON CY 0.01 0.1 37.5 Thursday BTO
CYS INVESTMENTS CYS 0.21 0.25 -40 Thursday BTO
CYTEC INDS INC CYT 1.32 1.51 18.9 Thursday AMC
DANAHER CORP DHR 0.83 0.77 2.35 Thursday BTO
DOVER CORP DOV 1.5 1.3 5.43 Thursday BTO
EASTGROUP PPTYS EGP 0.82 0.76 2.56 Thursday AMC
ELECTRN IMAGING EFII 0.17 0.39 66.67 Thursday AMC
FAIRCHILD SEMI FCS 0.12 0.25 -85.71 Thursday BTO
FIFTH THIRD BK FITB 0.44 0.4 -2.27 Thursday BTO
FIRST CASH FINL FCFS 0.65 0.69 1.79 Thursday BTO
FNB CORP FNB 0.21 0.22 0 Thursday AMC
GOLDMAN SACHS GS 2.48 2.85 31.67 Thursday BTO
GOOGLE INC-CL A GOOG 8.44 7.35 -14.27 Thursday AMC
GREENHILL & CO GHL 0.13 0.28 1.96 Thursday AMC
HOME BANCSHARES HOMB 0.31 0.28 0 Thursday BTO
HOME LOAN SERVC HLSS 0.5 0.34 4.35 Thursday BTO
HUB GROUP INC-A HUBG 0.49 0.5 2.04 Thursday AMC
HUBBELL INC -B HUB.B 1.59 1.45 5.38 Thursday BTO
HUNTINGTON BANC HBAN 0.17 0.19 6.25 Thursday BTO
INSTEEL INDS IIIN 0.2 0.05 66.67 Thursday BTO
INTUITIVE SURG ISRG 3.38 4.46 -3.7 Thursday AMC
KAISER ALUMINUM KALU 0.98 1.02 0 Thursday AMC
MB FINANCL INC MBFI 0.46 0.42 2.22 Thursday AMC
NETSCOUT SYSTMS NTCT 0.25 0.27 41.67 Thursday BTO
NUCOR CORP NUE 0.38 0.45 -10 Thursday BTO
OCEANFIRST FINL OCFC 0.28 0.28 3.57 Thursday AMC
PEABODY ENERGY BTU -0.03 0.51 760 Thursday BTO
PEOPLES UTD FIN PBCT 0.21 0.19 5.26 Thursday AMC
PHILIP MORRIS PM 1.43 1.38 -7.8 Thursday BTO
POOL CORP POOL 0.73 0.59 -0.71 Thursday BTO
PPG INDS INC PPG 2.34 2.24 4.7 Thursday BTO
PRIVATEBANCORP PVTB 0.37 0.27 12.12 Thursday BTO
QUEST DIAGNOSTC DGX 1.07 1.18 -2.75 Thursday BTO
SANDY SPRING SASR 0.42 0.44 25.64 Thursday BTO
SIMMONS FIRST A SFNC 0.41 0.41 -2.5 Thursday BTO
SNAP-ON INC SNA 1.4 1.26 6.29 Thursday BTO
SONOCO PRODUCTS SON 0.62 0.55 1.72 Thursday BTO
STRYKER CORP SYK 0.99 0.97 -2.91 Thursday AMC
SUPERVALU INC SVU 0.09 0 250 Thursday BTO
TAIWAN SEMI-ADR TSM 0.34 0.32 6.45 Thursday BTO
TAYLOR CAP GRP TAYC 0.41 0.61 19.05 Thursday AMC
TRINITY BIOTECH TRIB 0.2 0.2 -12 Thursday BTO
ULTRATECH STEP UTEK 0.04 0.45 -25 Thursday BTO
UNION PAC CORP UNP 2.47 2.19 0.85 Thursday BTO
UNITEDHEALTH GP UNH 1.53 1.5 10.24 Thursday BTO
UTD FINL BCP UBNK 0.25 0.22 -15.38 Thursday AMC
VERIZON COMM VZ 0.75 0.64 1.39 Thursday BTO
WD 40 CO WDFC 0.45 0.56 17.86 Thursday AMC
WERNER ENTRPRS WERN 0.29 0.34 -5.41 Thursday AMC
WESTERN ALLIANC WAL 0.32 0.24 14.81 Thursday AMC
WINNEBAGO WGO 0.28 0.14 0 Thursday BTO
BAKER-HUGHES BHI 0.78 0.73 -6.15 Friday BTO
FIRST HRZN NATL FHN 0.19 0.17 -10.53 Friday BTO
GENL ELECTRIC GE 0.35 0.36 0 Friday BTO
GENUINE PARTS GPC 1.2 1.11 14.88 Friday BTO
HONEYWELL INTL HON 1.24 1.2 4.92 Friday BTO
INGERSOLL RAND IR 1.1 1.07 5.56 Friday BTO
INTERPUBLIC GRP IPG 0.18 0.15 -14.29 Friday BTO
KANSAS CITY SOU KSU 1.12 0.82 1.05 Friday BTO
LABORATORY CP LH 1.79 1.76 1.12 Friday BTO
METROCORP BANCS MCBI 0.16 0.15 0 Friday AMC
MORGAN STANLEY MS 0.43 0.28 4.65 Friday BTO
MOSYS INC MOSY -0.14 -0.14 -27.27 Friday BTO
PARKER HANNIFIN PH 1.47 1.57 -8.72 Friday BTO
SCHLUMBERGER LT SLB 1.24 1.08 3.6 Friday BTO
SENSIENT TECH SXT 0.7 0.66 -9.72 Friday BTO
SUNTRUST BKS STI 0.69 1.98 1.49 Friday BTO
TEXTRON INC TXT 0.47 0.48 5.26 Friday BTO
VALMONT INDS VMI 2.48 2.12 8.56 Friday BTO

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