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Will Q1 Earnings Be the Low Point for the Year?

The 2014 Q1 earnings season takes center stage this week with Alcoa’s (AA) release after the close on Tuesday. Alcoa isn’t the overall first to report Q1 results, though it is the first S&P 500 member with the calendar fiscal quarter to come out with results. Companies with fiscal quarters ending in February have been reporting since mid-March and all 21 of those form part of the Q1 tally.

In fairness to Alcoa, however, the market starts paying attention to the earnings season after their earnings announcement even though the list of companies that report before it includes such industry leaders like FedEx (FDX - Analyst Report), Nike (NKE - Analyst Report) and others. In total, we have 33 companies reporting Q1 results this week, including 8 S&P 500 members. The reporting cycle really gets into high gear from next, as the chart below shows.

 

Expectations for 2014 Q1

Estimates for Q1 started coming down at an accelerated pace as companies predominantly guided lower on the 2013 Q4 earnings calls, consistent with the trend we have been seeing for more than a year now. Total Q1 earnings for companies in the S&P 500 are currently expected to be down -3.3% from the same period last year, a material decline from the +2.1% growth expected in early January 2014. Please note that the expected Q1 earnings decline has been exacerbated by Google’s new class of stock. Excluding Google from the S&P 500, total S&P 500 earnings would be down (only) -2.7%.  

The negative revision trend is widespread, but is particularly notable for the Retail, Basic Materials, Autos, Consumer Staples, and the Energy sectors, as the chart below shows.

 
With roughly two-thirds of S&P 500 companies beating earnings expectations 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 where we would witness a new all-time earnings total record each quarter. Total earnings for the S&P 500 reached a new all-time record of $267.6 billion in 2013 Q4.

Current estimates for 2014 Q1 aggregate to a quarterly total of $248.8 billion, but the expectation is that Q1 will be the low point for earnings this year, both in terms of earnings totals as well as the growth rate. Consensus expectations reflect a rebound in Q2, with the earnings totals in each of the following three quarters of the year setting new all-time records one after the other.

The chart below shows the aggregate quarterly earnings for the S&P 500 as whole.


 

Given the low Q1 expectations, it wouldn’t take much for companies to come out ahead of them. Roughly two-thirds of the S&P 500 members beat earnings expectations every quarter any way. So, more results along those lines would be nothing new and wouldn’t tell us much about the health of corporate earnings.

What we haven’t seen for a while instead is some evidence of strength on the revenue front and favorable comments from management teams about business outlook. Corporate guidance has been negative for almost two years now, causing estimates to keep coming down and the long hoped-for earnings growth turnaround getting pushed forward.  Guidance is important in any earnings season, but it is particularly important this time around given the relatively elevated expectations for the second half of the year and beyond.

Scorecard for 2014 Q1 (as of Friday, April 4th)

Total earnings for the 21 S&P 500 members were up +14.2% from the same period last year, with a ‘beat ratio’ of 57.1% and a median surprise of +1.9%. Total revenues were in the positive column as well, up +6.1%, with a revenue ‘beat ratio’ of 47.6% and a median surprise of +0.1%.

It’s premature to draw any conclusions from this small sample of results, but the growth rates and beat ratios for these 21 companies in Q1 are weaker than what we have seen from the same group of companies in other recent quarters. It has overall been a fairly uninspiring start to the Q1 earnings season.

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

Monday-4/7

  • Not much on the economic or earnings calendars.

Tuesday -4/8

  • Not much on the economic calendar, though Alcoa will be reporting results after the close.
  • Alcoa’s estimates have inched up in recent days, with the current Zacks Consensus EPS of 5 cents up a penny over the last 7 days.
  • WD-40 Company (WDFC - Snapshot Report) is the other notable company reporting results after the close.

Wednesday-4/9

  • We will get minutes of the Fed’s March 19 meeting in the afternoon, where it will be interesting to see discussion about the economic outlook. Unfortunately for all of us, we will most likely nothing about the ‘6 months’ comment that the Fed Chairwoman made in her news conference after the meeting.
  • Constellation Brands (STZ - Analyst Report) and Progressive Corp (PGR - Analyst Report) will report in the morning, while Bed, Bath & Beyond (BBBY - Analyst Report) will report after the close.

Thursday -4/10

  • While weekly Jobless Claims numbers will come out in the morning, we will get details about Federal Budget in the afternoon.
  • Family Dollar (FDO - Analyst Report), Rite Aid (RAD - Analyst Report), and Pier 1 Imports (PIR - Snapshot Report) are the notable companies reporting today, all in the morning.

Friday-4/11


Here is a list of the 33 companies reporting this week, including 8 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
NOVAGOLD RSRCS NG -0.03 -0.04 -100 Monday AMC
SCHULMAN(A) INC SHLM 0.34 0.27 18.75 Monday AMC
TEAM INC TISI -0.01 -0.01 0 Monday AMC
ZEP INC ZEP 0.09 0.17 6.25 Monday AMC
ALCOA INC AA 0.05 0.11 -33.33 Tuesday AMC
INTL SPEEDWAY ISCA 0.33 0.33 -6.78 Tuesday BTO
MISTRAS GROUP MG 0.12 0.07 3.33 Tuesday AMC
SCIENCE APP INT SAIC 0.65 N/A -12 Tuesday AMC
WD 40 CO WDFC 0.67 0.66 1.37 Tuesday AMC
BED BATH&BEYOND BBBY 1.6 1.68 -2.61 Wednesday AMC
PROGRESSIVE COR PGR 0.4 0.42 0 Wednesday BTO
CONSTELLATN BRD STZ 0.76 0.47 20.88 Wednesday BTO
ANGIODYNAMICS ANGO 0.1 0.08 0 Wednesday AMC
APOGEE ENTRPRS APOG 0.31 0.15 0 Wednesday AMC
API TECH CORP ATNY 0 -0.12 -800 Wednesday AMC
JOES JEANS INC JOEZ -0.01 0.03 -50 Wednesday AMC
MSC INDL DIRECT MSM 0.86 0.9 5.32 Wednesday BTO
NORTHRN OIL&GAS NOG 0.22 0.29 -4.35 Wednesday AMC
PENFORD CORP PENX 0.09 0.1 -172.73 Wednesday BTO
PRICESMART INC PSMT 0.87 0.82 -2.74 Wednesday BTO
RICHARDSON ELEC RELL 0.05 0.04 66.67 Wednesday AMC
RUBY TUESDAY RT -0.07 0.1 -79.17 Wednesday AMC
SIGMA DESIGNS SIGM 0.01 -0.61 0 Wednesday AMC
FAMILY DOLLAR FDO 0.91 1.21 -1.45 Thursday BTO
COMMERCE BANCSH CBSH 0.68 0.64 -2.82 Thursday BTO
IGATE CORP IGTE 0.37 0.47 2.27 Thursday BTO
PIER 1 IMPORTS PIR 0.4 0.6 -7.14 Thursday BTO
RITE AID CORP RAD 0.05 0.21 0 Thursday BTO
SHAW COMMS-CL B SJR 0.38 0.37 -4.17 Thursday BTO
TITAN MACHINERY TITN 0.18 0.73 -46 Thursday BTO
FASTENAL FAST 0.37 0.37 -2.94 Friday BTO
JPMORGAN CHASE JPM 1.43 1.59 6.87 Friday BTO
WELLS FARGO-NEW WFC 0.96 0.92 2.04 Friday BTO

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