The following excerpt is from this week's Earnings Trends. To see the full report, please click here.
Into the Heart of Q3 Earnings Season
The 2013 Q3 earnings season started off decidedly on the weak side, with earnings and revenue growth rates tracking lower than the last few quarters and companies struggling to beat expectations that had come down significantly during the quarter. But as more companies have reported, the picture has started to improve a bit, with the Q3 earnings season now looking more like what we saw in Q2 and the preceding few quarters.
Total earnings for the 212 S&P 500 companies that have reported results already, as of Thursday morning October 24th, are up +8.1% from the same period last year, with 67.9% beating earnings expectations with a median surprise of +2.5%. Total revenues for these companies are up +3%, with 42% beating revenue expectations with a median surprise that is barely in the positive.
The charts below show how the results from these 212 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates which looked materially weaker in the earlier phase of the Q3 reporting cycle have improved.
The earnings beat ratio looks more normal now than was the case last Friday when only 62.6% of the 99 companies that had reported by then were beating expectations. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.
The current above average earnings beat ratio for the 212 S&P 500 companies that have reported already confirms what many of us were suspecting all along – that estimates had fallen enough to make it easy for companies to come ahead of them. We see this quarter after quarter, with about two-thirds of the companies beating earnings expectations – a good illustration of management teams’ tendency to under-promise and over-deliver.
The composite earnings growth rate for Q3, combining the results from the 212 that have come out with the 288 still to come, currently remains at +2.9% on +1.2 higher revenues. It is perhaps reasonable to expect that the final Q3 earnings growth tally will likely be not much different from the +3.4% achieved in Q2.
We may not have had much growth in recent quarters, but the expectation is for strong growth resumption in Q4 and beyond. Estimates for Q4 have started coming down, with the current +9.1% growth pace down from last week’s +9.5%. But as the chart below shows, consensus estimates for Q4 and beyond represent a material acceleration in earnings growth.
Guidance has been overwhelmingly negative over the last few quarters and is not much different thus far in Q3 either, a few notable exceptions aside.
Dow Chemical’s (DOW - Analyst Report) comment that “the world continues to show hesitant growth at best, particularly in the near term” spotlights the global growth uncertainties. We saw this theme echoed in the report from Caterpillar (CAT - Analyst Report) as well, as it guided lower. The mining and construction giant noted that “there are encouraging signs, but there is also a great deal of uncertainty worldwide as we look ahead to 2014”. Comments from IBM (IBM - Analyst Report), Intel (INTC - Analyst Report), and Yum Brands (YUM - Analyst Report) earlier in the reporting cycle were to the same effect.
Not all management commentary is negative, with a handful of companies, notably Ford (F - Analyst Report) and Boeing (BA), standing out for positive guidance. Ford appeared particularly positive and confident in its outlook, particularly in its ability to turnaround its still-in-loss European operations. But these positive and upbeat comments are drowned out by the broadly negative or tentative guidance from a majority of the companies.
Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.
We are in the thick of the 2013 Q3 earnings season, with results from 212 S&P 500 companies accounting for 47% of the index’s total market capitalization, already out. Total earnings for these 212 companies are up +8.1%, with 67.9% beating earnings expectations. Revenues for these companies are up +3.0%, with a revenue ‘beat ratio’ of 42.0%.
Unlike Q2, the Finance sector has been less of a growth driver in Q3, with total earnings for the 60.1% of the sector’s total market capitalization that have reported already, up +13.0%. The sector’s growth momentum has decelerated from the last few quarters and industry leaders like J.P. Morgan (JPM) and Goldman Sachs (GS) have disappointed. Excluding Finance, total earnings for the S&P 500 that have been reported would be up +6.4% vs. +1.2% for the same companies in Q2.
Technology spotlights the ex-Finance variance from Q2, with total earnings for the 45.7% of the sector’s total market capitalization that have reported up +9.6% on +2.0% higher revenues. Strong growth rates at Google (GOOG) and Sandisk (SNDK) and Micron (MU) have helped the sector reverse the negative earnings growth trend of the last few quarters.
The +9.6% earnings growth for the 32 Tech companies that have reported compare to -2% earnings decline in Q2 and the 4-quarter average of -0.5%.
Total Q3 earnings for all S&P 500 companies, combing the 212 that have reported with the 288 still to come, are expected to be up +2.9%, which reflects +1.2% revenue growth and modest gains in margins. This compares to +3.4% earnings growth in Q2.
Guidance has been overwhelmingly negative over the last few quarters and the trend from the initial Q3 reports isn’t much different. The quality and tone of company guidance will be key to where estimates for Q4 settle down, which currently remain fairly elevated.
While there is not much growth, the overall level of total earnings is quite high, with total earnings in Q3 not a lot lower from Q2’s all-time quarterly record. Earnings for the S&P 500 companies are expected to total $257.0 billion in Q3, down from Q2’s record of $260.3 billion.
To see the Full Earnings Trends PDF, please click here.