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Earnings Preview

The Q2 earnings season has come to an end for 9 of the 16 Zacks sectors in the S&P 500. Except for the Retail sector, most of the other sectors are close to the finish line as well. We will get results from 95 companies this week, including 19 S&P 500 members.

The Retail sector is heavily represented in this week’s reports, with industry leaders like Home Depot (HD - Analyst Report), Target (TGT - Analyst Report) and Gap (GPS - Analyst Report) reporting Q2 results. Notable reports from other sectors include Hewlett-Packard (HPQ - Analyst Report) and Salesforce.com (CRM - Analyst Report).

The Retail sector has been struggling on the earnings front in recent quarters and this reporting cycle has been no different. The heavily promotional environment has been forcing retailers to offer discounts to stay relevant even as they deal with the growing shift to online sales. The big brick-and-mortar retailers have been trying to adjust to this shifting landscape. But as Best Buy’s (BBY) and Wal-Mart’s (WMT - Analyst Report) struggles show, it isn’t clear at this stage how the big-box business model will evolve as a result of these industry challenges.

On top of these industry-specific challenges are the issues facing consumers, who have yet to fully recover from the financial crisis. The labor market is no doubt improving, but wage growth has been essentially stagnant, restricting households’ buying power. In a nutshell, it has been a tough backdrop for retailers. No doubt the stock-price performance of the retail sector in the S&P 500 has been one of the weakest in the index – down -1.1% vs. a gain of +6.5% for the index as a whole.

With respect to the sector’s performance thus far, total earnings for 27 Retail sector companies in the S&P 500 that have already reported Q2 results are up +2.0% on +5.9% higher revenues, with only 40.7% beating earnings estimates and a respectable 55.6% coming ahead of top-line expectations.

The 40.7% earnings beat ratio for the sector is the weakest in the S&P 500 index, matching the sector’s under-performance in the preceding quarter. But while Q1 was written off due to weather related issues, there is no handy excuse to fall back upon this time around. Retailers don’t have so much of a revenue problem – revenues are good enough. They have a margin problem, with the super competitive retail environment eating into their margins.    

The Q2 Scorecard (as of Friday morning, August 15th)

Total earnings for the 470 S&P 500 members that have reported already are up +8.2% from the same period last year, with a ‘beat ratio’ of 66.0% and a median surprise of +2.7%. Total revenues are up +4.4%, with a revenue ‘beat ratio’ of 61.3% and a median surprise of 0.8%.

The table below shows the summary scorecard

Any way you look at it, the 2014 Q2 earnings season has been very positive - the growth rates are better, more companies are coming ahead of estimates, and there is even some modest improvement on the guidance front. Guidance still remains weak, with most companies guiding lower. But the proportion of companies guiding lower is smaller than what we have been seeing in recent quarters. And even those that don’t offer guidance have been qualitatively talking up their business outlook.

The charts below compare the results thus far from these 470 companies with what we saw from the same group of companies in other recent quarters.

The earnings & revenue growth rates compared
 

The beat ratios compared

 

The revenue growth rates and beat ratios are notably better relative to what we have become used to seeing in recent quarters.

Small-caps Update – S&P 600 Q2 Scorecard

Stock prices of small-cap stocks have been underwater this year, with the S&P 600 down -2.5% vs. a gain of +6.5% for the S&P 500 in the year-to-date period. This underwhelming stock price performance is getting confirmed by the group’s mixed results thus far in the Q2 reporting cycle.

As of Friday, August 15, we have seen Q2 results from 539 S&P 600 members or 89.8% of the index’s total members. Total earnings for these 539 companies are up +12.6% from the same period last year on +11.2% higher revenues, with 48.8% beating EPS estimates and 38.4% coming ahead of top-line expectations.  

In terms of comparison to other recent quarters, the earnings growth is better than what we have seen from the same group of 539 small-cap companies in 2014 Q1 as well as the average growth rate of the last four quarters. The earnings beat ratio is in-line with what the same group has performed over that same period. The top-line performance presents a mixed picture, with the growth rate modestly better while the beat ratios tracking lower.

A word about the beat ratios for the small-cap stocks may be in order. While roughly two-thirds of the S&P 500 companies beat EPS estimates on average, the ratio is a lot lower for the small-cap index, with about 50% of the S&P 600 companies beating earnings estimates.

Here is the updated Q2 scorecard for the S&P 600 index

 

The table below provides a comparison of price performance and earnings multiples for the S&P 500 and S&P 600 indexes.
 


The Composite Q2 Picture for the S&P 500

The composite (or blended) growth picture for Q2, combining the actual results for the 470 S&P 500 companies that have reported with estimates for the 30 still-to-come reports, shows total earnings increasing by +8.0% on +4.4% higher revenues and modestly higher net margins. This would follow earnings growth of +1.3% in Q1 on +2.8% higher revenues.  The Q2 earnings growth rate has been steadily going up, as more companies report and beat estimates.

The table below compares what is expected for Q2 with what was actually achieved in Q1.

 

Record S&P 500 Earnings in Q2

Total earnings in Q2 are on track to reach a new all-time quarterly record, surpassing the last record set in 2013 Q4. The chart below shows these quarterly earnings totals, with estimates for the coming quarters all in the record territory.

The Sustainability Question

As discussed in this report, the earnings results thus far represent a notable improvement over what we have become accustomed to seeing in recent quarters. But is it a one-off bounce from the low levels in Q1 or the start of something sustainable and enduring?

The ongoing revisions trend in estimates for the current period appears to be indicating that this favorable trend can be sustained. We will see how the revisions trend unfolds through the remainder of this reporting cycle, but estimates for 2014 Q3 have held up very well thus far – better than what we have seen over comparable periods in other recent quarters.

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

Monday-8/18

  • Aside from the August homebuilder sentiment index, there is not much on the economic docket.
  • Urban Outfitter (URBN - Analyst Report) is the only notable earnings report today, coming out after the close.

Tuesday -8/19

  • The July CPI and Housing Starts reports will be coming out in the morning. Inflation hasn’t been an issue and the CPI report will most likely reconfirm that. The Starts report is expected to show big gains from the prior month’s level and will likely resonate in the market.
  • Home Depot (HD - Analyst Report), TJX Cos (TJX - Analyst Report) and Medtronic (MDT - Analyst Report) are the notable earnings reports, all in the morning.
  • Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of positive earnings surprises, is showing Home Depot coming out with an earnings beat.
  • Our research shows that companies with positive ESP and Zacks Rank of 1, 2 or 3 are highly likely to beat earnings estimates. Home Depot currently has Zacks Rank #3 (Hold) and Earnings ESP of +1.4%.
  • For more details about Earnings ESP, please check this page.

Wednesday-8/20

  • Minutes of the Fed’s last meeting coming out in the afternoon could be market movers.
  • Target (TGT - Analyst Report) and Lowes (LOW - Analyst Report) are the key earnings reports in the morning, while Hewlett-Packard (HPQ - Analyst Report) will report after the close.

Thursday -8/21

  • In addition to weekly Jobless Claims, we will get August’s Philly Fed survey and the July Existing Home Sales and Leading Indicators reports.
  • Dollar Tree (DLTR - Analyst Report) is the notable earnings report in the morning, while Salesforce.com (CRM - Analyst Report), Gap (GPS - Analyst Report) and GameStop (GME - Analyst Report) will report after the close.
  • With a Zacks Rank #3 (Hold) and Earnings ESP of +7.7%, Dollar Tree is highly likely to come out with a positive earnings surprise.

Friday-8/22

  • Not much on the economic or earnings calendars.

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Here is a list of the 95 companies reporting this week, including 19 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
URBAN OUTFITTER URBN 0.49 0.51 -2.55 Monday AMC
AIRMEDIA GP-ADR AMCN N/A -0.08 N/A Monday AMC
CHINA MOBIL-ADR CMGE 0.21 -0.1 N/A Monday BTO
FABRINET FN 0.31 0.35 3.45 Monday AMC
FUEL SYSTEM SOL FSYS 0 0.13 -66.67 Monday BTO
JINKOSOLAR HLDG JKS 0.72 0.56 -51.22 Monday BTO
JUMEI INTL-ADR JMEI 0.11 N/A N/A Monday AMC
PERFECT WORLD PWRD 0.36 0.27 31.5 Monday AMC
HOME DEPOT HD 1.45 1.24 1.6 Tuesday BTO
MEDTRONIC MDT 0.92 0.88 -0.15 Tuesday BTO
TJX COS INC NEW TJX 0.73 0.66 -4.65 Tuesday BTO
AMER WOODMARK AMWD 0.41 0.43 -22.73 Tuesday BTO
CHEETAH MBL-ADR CMCM -0.02 N/A N/A Tuesday BTO
CRH PLC-ADR CRH N/A N/A N/A Tuesday N/A
CAIRN EGY PLC CRNCY N/A N/A N/A Tuesday N/A
CYREN LTD CYRN -0.03 -0.01 -200 Tuesday BTO
DICKS SPRTG GDS DKS 0.65 0.71 -5.11 Tuesday BTO
KEY TRONIC KTCC 0.11 0.22 -5.88 Tuesday N/A
LA-Z-BOY INC LZB 0.21 0.18 0 Tuesday AMC
NAVIOS MARI ACQ NNA 0.01 0 -50 Tuesday BTO
PHOTRONICS INC PLAB 0.05 0.1 -50 Tuesday AMC
ELIZABETH ARDEN RDEN -0.29 0.1 -4300 Tuesday BTO
REAL GOODS SOLR RGSE -0.17 -0.11 -44 Tuesday AMC
TARENA INTL-ADR TEDU 0.07 N/A 0 Tuesday AMC
YOUKU.COM- ADR YOKU -0.04 -0.09 8.7 Tuesday AMC
HEWLETT PACKARD HPQ 0.89 0.86 0 Wednesday AMC
L BRANDS INC LB 0.62 0.61 3.92 Wednesday AMC
LOWES COS LOW 1.02 0.88 -4.92 Wednesday BTO
PETSMART INC PETM 0.94 0.89 1.96 Wednesday BTO
SMUCKER JM SJM 1.37 1.24 4.31 Wednesday BTO
STAPLES INC SPLS 0.12 0.17 -12.41 Wednesday BTO
TARGET CORP TGT 0.78 1.19 0 Wednesday BTO
AMER EAGLE OUTF AEO 0 0.1 3.85 Wednesday BTO
AVINO SILVER&GD ASM N/A 0.05 N/A Wednesday N/A
CACI INTL A CACI 1.43 1.56 -1.63 Wednesday AMC
COCA-COLA AMATI CCLAY N/A N/A N/A Wednesday N/A
AMERICAS CAR-MT CRMT 0.69 0.79 3.03 Wednesday AMC
CITI TRENDS INC CTRN -0.29 -0.34 17.31 Wednesday BTO
E-HOUSE CHINA EJ 0.05 0.08 66.67 Wednesday BTO
EATON VANCE EV 0.63 0.52 5.36 Wednesday BTO
EVOGENE LTD EVGN -0.11 -0.05 30.77 Wednesday BTO
GASLOG LTD GLOG 0.13 0.12 -7.14 Wednesday BTO
HAIN CELESTIAL HAIN 0.89 0.65 2.33 Wednesday BTO
HEINEKEN NV HEINY N/A N/A N/A Wednesday N/A
INTL RECTIFIER IRF 0.28 -0.02 22.73 Wednesday AMC
JA SOLAR HOLDGS JASO 0.17 -0.58 300 Wednesday BTO
LEJU HOLDINGS LEJU 0.15 N/A 66.67 Wednesday BTO
LIGHTINTHEBOX-A LITB -0.14 0 -111.11 Wednesday BTO
MADISON SQUARE MSG 0.29 0.47 -38.46 Wednesday BTO
POPEYES LA KTCH PLKI 0.4 0.35 2.22 Wednesday AMC
RAVEN INDS INC RAVN 0.27 0.23 -11.76 Wednesday BTO
STAR BULK CARRS SBLK -0.02 0.37 -50 Wednesday BTO
SEMTECH CORP SMTC 0.29 0.46 -17.24 Wednesday AMC
SYNOPSYS INC SNPS 0.35 0.47 -6.67 Wednesday AMC
VALUEVISION MDA VVTV 0.01 -0.02 -25 Wednesday BTO
VESTAS WIND SYS VWDRY N/A -0.14 N/A Wednesday N/A
XUNLEI LTD-ADR XNET 0 N/A N/A Wednesday AMC
SALESFORCE.COM CRM -0.01 -0.09 -171.94 Thursday AMC
DOLLAR TREE INC DLTR 0.65 0.56 0 Thursday BTO
GAMESTOP CORP GME 0.19 0.09 3.51 Thursday AMC
GAP INC GPS 0.69 0.64 1.75 Thursday AMC
HORMEL FOODS CP HRL 0.48 0.42 -8.77 Thursday BTO
INTUIT INC INTU -0.05 -0.11 -2.29 Thursday AMC
PATTERSON COS PDCO 0.5 0.45 -7.58 Thursday BTO
ROSS STORES ROST 1.09 0.98 -0.86 Thursday AMC
AHOLD N V ADR AHONY N/A 0.27 -20 Thursday N/A
ACCURAY INC ARAY -0.07 -0.2 62.5 Thursday AMC
AEROPOSTALE INC ARO -0.59 -0.34 27.78 Thursday AMC
AVIAT NETWORKS AVNW -0.1 -0.02 -433.33 Thursday AMC
BUCKLE INC BKE 0.53 0.52 0 Thursday BTO
BON-TON STORES BONT -1.43 -1.75 -4.52 Thursday BTO
BROCADE COMM SY BRCD 0.16 0.15 0 Thursday AMC
CATO CORP A CATO 0.51 0.51 0 Thursday BTO
CYBERONICS INC CYBX 0.55 0.48 0 Thursday BTO
EROS INTL PLC EROS 0.07 N/A -33.33 Thursday BTO
GOLD FIELDS-ADR GFI N/A -0.05 0 Thursday N/A
KIRKLANDS INC KIRK -0.03 -0.03 20 Thursday BTO
LANTRONIX INC LTRX -0.02 -0.06 50 Thursday AMC
MENTOR GRAPHICS MENT 0.06 0.24 0 Thursday AMC
MARVELL TECH GP MRVL 0.22 0.15 -4.55 Thursday AMC
NORDSON CORP NDSN 1.13 0.99 7.78 Thursday AMC
NAVIOS MARI HLD NM -0.19 -0.16 107.69 Thursday BTO
NEW YORK & CO NWY -0.01 -0.04 10 Thursday AMC
PERRY ELLIS INT PERY -0.13 -0.15 96.43 Thursday BTO
CHILDRENS PLACE PLCE -0.44 -0.42 11.48 Thursday BTO
QUNAR CAYMN LTD QUNR -0.4 -0.07 -21.43 Thursday AMC
SCANSOURCE INC SCSC 0.6 0.71 9.26 Thursday AMC
STAGE STORES SSI 0.51 0.41 5 Thursday BTO
FRESH MARKET TFM 0.35 0.32 2.38 Thursday AMC
TORO CO TTC 0.86 0.68 4.14 Thursday BTO
58.COM INC-ADR WUBA 0.15 0.04 -25 Thursday BTO
ANN INC ANN 0.7 0.76 -2.94 Friday BTO
ALUMINA LTD AWCMY N/A N/A N/A Friday N/A
FOOT LOCKER INC FL 0.54 0.46 4.72 Friday BTO
HIBBET SPORTS HIBB 0.31 0.4 -0.91 Friday BTO
MOBILE TELE-ADR MBT 0.52 0.78 -17.39 Friday BTO
ROYAL BANK CDA RY 1.4 1.38 7.03 Friday BTO

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