The following is an excerpt from this week's Earnings Trends article. To see the full report, please click here.
Taking Stock of the Q1 Earnings Season
The 2014 Q1 earnings season takes center stage from next week onwards even though the reporting cycle has actually been underway for a couple of weeks. The reports thus far (19 S&P 500 companies have reported results) are from companies with fiscal quarters ending in February, which we count as part of the Q1 tally. Results for companies with March ending quarter will start next week with Alcoa’s (AA - Analyst Report) release on April 8th.
Many of these early February quarter-ending companies aren’t obscure players as the list includes industry leaders like FedEx (FDX - Analyst Report), Nike (NKE - Analyst Report), Oracle (ORCL - Analyst Report), and others. These initial reports don’t inspire much confidence and appear to be pointing towards another underwhelming reporting season ahead. But it’s perhaps premature to draw any firm conclusions based on such an unrepresentative sample of reports.
The chart below shows weekly schedule for how Q1 results will come out.
Expectations for the Q1 earnings season as whole remain low, with total earnings expected to be down -2.6% from the same period last year on +1.0% higher revenues and modestly lower margins. As has been the trend for more than a year now, estimates for Q1 came down sharply as the quarter unfolded. The current -2.6% decline in total earnings in Q1 is down from +2.1% growth expected at the start of the quarter in January.
Current estimates for total S&P 500 earnings in Q1 are down -2.9% from what was expected at the start of the quarter in early January. This magnitude of negative revision to Q1 earnings over the last three months is greater than what we witnessed in the comparable period in 2013 Q4, but is broadly in-line with the magnitude of the 4-quarter average of negative revision.
The chart below shows the magnitude of negative earnings revision for 2014 Q1 and each of the preceding four quarters over the course of each quarter.
Estimates for Q1 have fallen across the board, but the trend is particularly notable for the Retail, Basic Materials, Autos, Consumer Staples, and the Energy sectors, as the chart below shows.
With two-thirds of S&P 500 members typically beating earnings estimates in any reporting cycle, actual Q1 results will almost certainly be better than these pre-season expectations. But Q1 is unlikely to repeat the performance of the last few quarters when we would witness new all-time records for total earnings each quarter.
Guidance has been overwhelmingly weak for more than a year now, keeping the revisions trend firmly in the negative direction. Odds are that we wouldn’t see any change on that front this earnings season either, bringing down estimates for the rest of the year. Investors haven’t cared about negative estimate revisions thus far, but it will be interesting that behavior will remain in place going forward as well.
The 2014 Q1 earnings season has gotten underway with results from 19 S&P 500 members (with fiscal quarters ending in February) already out. The reporting cycle gets into high gear from next week onwards.
Total earnings for the 19 S&P 500 companies that have reported results are up +0.5%, with 57.9% beating earnings expectations. Revenues for these companies are up +4.3%, with a revenue ‘beat ratio’ of 47.4%. The performance from these companies is weaker than what we have seen from this same group of companies in recent quarters.
For the S&P 500 companies as whole, total Q1 earnings are expected to be down -2.6% from the same period last year, on +1% higher revenues and 35 basis points in lower margins. Sequentially, total earnings for the S&P 500 are expected to be down -6.3%.
Estimates fell sharply as the quarter unfolded, with the current -2.6% decline in total earnings down from expectations of +2.1% positive growth in early January.
The growth weakness is broad-based and not concentrated in any one sector, with 10 of the 16 Zacks sectors expected to show earnings declines in Q1. Among the major sectors, earnings are expected at this stage to be down -3.9% in Finance, -4.2% in Technology, -6.9% in Energy, and -13.5% in Autos. Business Services and Utilities are the only sectors expected to show double-digit earnings growth.
The Q1 earnings season is expected to be the low point of this year’s earnings picture, both in terms of total earnings as well as the growth rate. Total quarterly earnings reached an all-time record in 2013 Q4, but are expected to fall short of that level in 2014 Q1. Expectations for the coming quarters reflect a strong ramp up, with each of the following three quarters a new all-time record.
Guidance has overwhelmingly been negative in recent quarters and we saw the same trend in place with the initial Q1 reports. Continuation of that trend through the rest of this earnings season will result in the by-now all-too-familiar negative revisions to estimates for 2014 Q2.
Total earnings in Q2 are currently expected to be up +5.4%, followed by growth rates of +7.2% in Q3 and +9.4% in Q4. For the full year, total earnings are expected to be up +7.8% in 2014 and +11.7% in 2015.
The bottom-up ‘EPS’ estimate for the S&P 500 for 2014 currently stands at $116.60, while the top-down estimate for the same is currently at $117.25. For 2015, the bottom-up estimate remains $130.19.
To see the full Earnings Trends report, please click here.