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The following excerpt is from this week's Earnings Trends. To see the full report, please click here.
What’s Wrong with the Earnings Picture?
There is actually nothing wrong with earnings picture; they are about as good or as bad any of the other recent quarters. Total earnings for the S&P 500 are on track to reach a new all-time quarterly record and even the earnings growth for the quarter in on track to be the highest in 2013 (thanks to easy comparisons). The beat ratios started off a bit weak, but even those appear to be catching up fast with historical norms.
But if Q4 results are no different, by and large, from other recent quarters, then why all the angst and handwringing in the market about earnings? My sense is that investors have finally started paying attention to the earnings picture. The picture is definitely not terrible, but it’s not consistent with a stock market sitting close to all time highs either.
Companies have been guiding lower quarter after quarter, prompting earnings estimates to keep moving for almost two years now in only one direction – down. The market didn’t care much about this, with an ever helpful Fed keeping hopes of an eventual earnings ramp-up alive. But the Fed has started to get out of the QE business just as the economic picture has started looking up. Not many people are worried about Europe anymore and few would bet a hard landing for China despite today’s softish PMI readings.
All in all, the economic backdrop had raise hopes that we may finally start seeing positive and reassuring commentary from management teams on the Q4 earnings calls, which will produce greater confidence in estimates for 2014 Q1 and beyond. But barring a few exceptions, we are not seeing that, as the overall tone of management guidance still remains negative. It’s still relatively early in the reporting cycle, but what we have seen thus far doesn’t inspire much confidence about the rest of this earnings season.
The chart below shows what is going on with 2014 Q1 estimates
And that’s perhaps the reason for the earnings anxiety in the market. We have been singing this tune for a very long time, but finally folks have started paying attention to it. Better late than never, I guess.
The 2013 Q4 Scorecard
With respect to the Scorecard for 2013 Q4, we have seen results from 102 S&P 500 members accounting for 27.3% of the index’s total market capitalization. Total earnings for these 102 companies are up +22.8% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.0%. Total revenues for these companies are up +3.6%, with 54.9% beating revenue expectations with a median surprise of +0.8%.
The +22.8% ‘headline’ total earnings growth rate definitely looks fairly robust, particularly when compared to the growth rate for this same group of 102 companies in the last few quarters. Before we get too excited about this growth pace and start extrapolating it into the coming quarters, we should keep in mind that the bulk of this growth is due to easy comparisons for just three companies – Bank of America (BAC - Analyst Report), Verizon (VZ - Analyst Report), and Travelers (TRV - Analyst Report) Exclude these three and total earnings growth for the S&P 500 companies that have reported drops to +8.3% from +22.8%, which is about where growth has been in recent quarters.
The composite picture for Q4 – combining the results for the 102 companies that have reported already with the 398 still to come – is for earnings growth of +7.6% on +1.7% higher revenues and 52 basis points higher margins. The actual Q4 growth rally will most likely be higher than this, a function of management’s well refined expectations management skills.
More important than what happened in Q4 is the question of whether management guidance for the coming period(s) will get any better from what we have become accustomed to in recent quarters. My sense is that the preponderance of guidance will remain negative, as has been the case for more than a year now. This will keep downward pressure on estimates for the coming quarters.
Trends on the estimate revision front have been negative for a while, but we could afford to overlook such details in the Fed-inspired rally. It will be interesting to see if investors will continue shrug estimate cuts in the post-Taper world.
Total earnings for the 102 S&P 500 companies that have reported results are up +22.8%, with 65.7% beating earnings expectations. Revenues for these companies are up +3.6%, with a revenue ‘beat ratio’ of 54.9%.
Easy comparisons for Bank of America, Verizon and Travelers accounts for most of the growth thus far. Excluding these three companies, the earnings growth rate drops to +8.3%, which is comparable to what this same group of companies have achieved in recent quarters. The beat ratios started out weak and are still a tad bit weak relative to recent quarters, but have caught up quite a bit lately.
Total Q4 earnings for all S&P 500 companies, combing the 102 that have reported with the 398 still to come, are expected to be up +7.6%, which reflects +1.7% revenue growth and modest gains in margins. This compares to +5.1% earnings growth in Q3.
Total earnings in Q4 are on track to reach a new all-time quarterly record, surpassing the record reached just the preceding quarter.
Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +25.5%. Outside of Finance, total earnings growth drops to +3.92%. Technology sector earnings are expected to be relatively flat from the year-earlier period, while earnings in the Energy, Medical, and Staples sectors are expected to be below the year-earlier level.
Earnings growth is expected to accelerate this year, with full-year 2014 earnings expected to be up +9.1% after the expected +4.8% growth in 2013. Total earnings are expected to increase a further +10.8% in 2015.
Guidance has overwhelmingly been negative in recent quarters and the trend from pre-announcements in the run up to the Q4 reporting season doesn’t appear to be much different either. It will be interesting to see if the recently quarterly trend of negative guidance will remain in place this quarter as well.
To see the Full Earnings Trends PDF, please click here.