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Earnings Outlook

The following excerpt is from this week's Earnings Trends.  To see the full report, please click here

Q3 Earnings: The Best of 2013 Thus Far

The Q3 earnings season started weak, but has turned out to be the best of 2013. But before we get too carried away with that positive take, let’s not forget that the ‘best of 2013’ may not be much to crow about, particularly in terms of growth. There is simply not much growth and most companies are still guiding lower, prompting estimates for Q4 to come down.

That said, the picture emerging from the Q3 earnings season compares favorably to recent quarters in terms of growth, beat ratios, and the absolute level of total earnings, which are on track to reach a new all-time record in Q3.

Total earnings for the 440  S&P 500 companies that have reported results already, as of Thursday morning November 7th, are up +4.6% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 51.4% beating revenue expectations with a median surprise of +0.1%.

The charts below show how the results from these 440 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 earlier in this reporting cycle. 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 composite earnings growth rate for Q3, combining the results from the 440 that have come out with the 60 still to come, currently remains at +4.6% on +2.9% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.

We may not have had much growth in recent quarters, but the expectation is for material growth acceleration in Q4 and beyond. The chart below shows total earnings growth on a trailing 4-quarter basis. The +3.1% growth rate in the chart means that total earnings in the four quarters through 2013 2Q were up by that much from the four quarters through 2012 2Q. As you can see, the expectation is for strong uptrend in the growth momentum from Q4 onwards.


 

Guidance has been overwhelmingly negative over the last few quarters and is not much different in Q3 either, a few notable exceptions aside. We saw underwhelming guidance earlier in the cycle from such bellwethers as Starbucks ((SBUX - Analyst Report)), Dow Chemicals ((DOW - Analyst Report)), and Caterpillar ((CAT - Analyst Report)), and more recently from Whole Foods ((WFM - Analyst Report)), Kellogg ((K - Analyst Report)), Mondelez (MDLZ) and others.

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.

Key Points

  • Total earnings for the 440 S&P 500 companies that have reported results already are up +4.6%, with 65.7% beating earnings expectations. Revenues for these companies are up +2.9%, with a revenue ‘beat ratio’ of 51.4%.
  • Unlike Q2, the Finance sector has been less of a growth driver in Q3, with total earnings for the sector up +9.9%. Excluding Bank of America (BAC), the sector’s Q3 earnings growth drops to +3.3%. The sector’s growth momentum has decelerated from the last few quarters, with industry leaders J.P. Morgan ((JPM - Analyst Report)) and Goldman Sachs (GS) disappointing.
  • Technology spotlights the ex-Finance variance from Q2, with total earnings for the 88.7% of the sector’s total market capitalization that have reported up +5.5% on +3.7% 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 +5.5% earnings growth for the 57 Tech companies that have reported compare to -10.1% earnings decline in Q2 and the 4-quarter average of -2.0% for the same group of companies.
  • Total Q3 earnings for all S&P 500 companies, combing the 440 that have reported with the 60 still to come, are expected to be up +4.6%, which reflects +2.9% revenue growth and modest gains in margins. This compares to +3.5% earnings growth in Q2.
  • Guidance remains negative, prompting estimate cuts for Q4, though there likely still plenty of downside to current +9.5% growth expected in Q4. While there is not much growth, the overall level of total earnings is quite high, with total earnings in Q3 on track to reach a new all-time quarterly record at $261.1 billion, surpassing Q2’s record of $ 258.5 billion.
  • Total earnings for the S&P 500 are expected to be up +6.3% in 2013 and +11.2% in 2014.

To see the Full Earnings Trends PDF, please click here.

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