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Earnings Trends

The following is an excerpt from the weekly Earnings Trends article.  To see the full report, please click here

Q3 Earnings Estimates Not Falling As Much

The Q2 earnings season has turned out to be better relative to other recent reporting periods – the growth rate is better, more companies are beating estimates, and the very modest improvement on the guidance front is starting to show up in estimates for the current period.

The reduced negative revisions rate at this stage in the reporting cycle is the most notable positive element of this earnings season, in my judgment. Estimates for the current quarter are following the pattern that we have been seeing quarter after quarter, but the magnitude of negative revisions is less relative to other recent comparable periods.

The Q2 Scorecard

We have already seen Q2 results from 424 S&P 500 members that combined account for 89.8% of the index’s total market capitalization. Total earnings for these 424 companies are up +9.0% from the same period last year on +4.6% higher revenues, with 65.6% beating EPS estimates and 60.6% coming out with positive revenue surprises. This is better performance than we have seen at this stage in other recent reporting cycles.

We have two sets of charts below – one compares the earnings and revenue growth rates for these 424 companies with what these same companies reported in 2014 Q1 and the 4-quarter average and the second chart compares the beat ratios for these companies.

Growth is Better

 

The aggregate growth picture is actually even better once the Finance sector’s anemic growth numbers are excluded. Excluding Finance, total earnings for the companies that have reported results are up +11.2% from the same period last year on +4.8% higher revenues.  

And More Positive Revenue Surprises

 

The composite picture for Q2, combining the actual results from the 424 S&P 500 members that have reported with estimates for the still-to-come 76 companies, total earnings are expected to reach a new all-time quarterly record, and increase by +8.0% from the same period last year on +4.2% higher revenues. This is a material improvement over the preceding quarter, when total earnings and revenues were essentially flat.

Estimates for the 2014 Q3 have started coming down, with the current +4.2% total earnings growth expected in the current period down from +4.8% last week, and +6.3% at the start of the quarter. But the magnitude of negative revisions in Q3 thus far is the lowest we have seen in more than a year. The chart below compares the magnitude of negative revision to 2014 Q3 estimates over the first five weeks of the quarter to negative revisions over comparable periods in the preceding 5 quarters.

   

Most of the remaining Q2 earnings reports are from the beleaguered Retail sector, which will likely put downward pressure on Q3 estimates. But even then, the magnitude of negative revisions for Q3 will be the lowest that we have seen in a while. If sustained over the next reporting season (Q3 earnings season), this will represent a material improvement in the corporate earnings picture.

Key Points

  • The 2014 Q2 earnings season is presenting a much improved picture of the overall earnings picture relative to what we have become used to seeing in recent quarters.
  • Total earnings for the 424 S&P 500 members that have reported results are up +9.0% on +4.6% higher revenues, with 65.6% beating EPS estimates and 60.6% coming ahead of revenue estimates. This is better performance than we have saw from the same group of companies in recent quarters, with the revenue beat ratio notably impressive.  
  • The Finance sector has been a drag on the aggregate growth picture, but the sector’s results have nevertheless been better than expected. There is not much growth, but 78.8% of the sector companies that have reported results have beaten EPS estimates and 74.7% have topped revenue estimates.  
  • Growth from the Technology sector has been the best in many recent quarters, with total earnings for 87.9% of the sector’s total market capitalization that have reported are up +13.7% on +7.0% higher revenues. Strong gains at Intel (INTC - Analyst Report), Micron Technology (MU - Analyst Report), and Apple (AAPL - Analyst Report) are big drivers of the year-over-year growth for the sector. Excluding these three companies, total Tech sector growth at this stage drops to +8.8%.Other sectors with strong earnings performance include Medical (+15.8%), Construction (+14.2%), Utilities (+14.5%), Basic Materials (+11.9%), Transportation (+11.5%), and Energy (+11.7%).  
  • The Medical sector’s +15.8% earnings growth on +12.4% higher revenues is primarily due to strength at Gilead Sciences (GILD - Analyst Report), but most of the sector companies have also come out with positive earnings and revenue beats. Easy comparisons at Verizon (VZ - Analyst Report) account for the Utilities sector’s strong growth numbers.   
  • The composite Q2 picture for the S&P 500, combining the actual results from the 424 companies with estimates for the 76 still to come, is for earnings to be up +8.0% from the same period last year, on +4.2% higher revenues and 36 basis points in higher margins. Sequentially, total earnings for the S&P 500 are expected to be up +7.7%, with the overall level of total earnings for the index expected to reach a new all-time quarterly record.
  • Total Q2 earnings are on track to reach a new all-time quarterly record, surpassing the level reached in 2013 Q4. The growth pace is expected to accelerate in the second half of the year, with total earnings expected to be up +7.3% in the back half of  the year +12.2% next year.
  • The Q2 earnings is moving along nicely for the small-cap space as well, with results from 435 S&P 600 members or 72.5% of the index’s total membership already out. Total earnings for these 435 index members are up +15.1% on +8.7% higher revenues, with 50.8% beating EPS estimates and 37.7% coming ahead of top-line expectations.
  • The beat ratios for these 435 S&P 600 members are lower relative to what we have seen from this same group of companies in other recent quarters, but the earnings and revenue growth rates compare favorably to historical levels.
  • The top-down ‘EPS’ estimate for the S&P 500 is currently $117 for 2014 and $125 for 2015, while the bottom-up estimate are $116 and $130, respectively.

To view the full Earnings Trends report, please click here

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