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Earnings Preview

Q2 Earnings Season in the Home Stretch

The Q2 earnings season has come to an end for 11 of the 16 Zacks sectors in the S&P 500. With results from just 10 index members awaited at this stage, the remaining sectors aren’t that far from finish line either. We will get results from 100 companies this week, including 7 S&P 500 members.

The earnings focus lately has been on the Retail sector and this week’s reporting docket is also heavily weighted towards this sector. 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 - Analyst Report) 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 – up +0.9% vs. a gain of +8.6% for the index as a whole.

With respect to the sector’s performance thus far, total earnings for the 39 Retail sector companies in the S&P 500 (out of 43 total) that have already reported Q2 results are up +2.3% on +5.7% higher revenues, with only 48.7% beating earnings estimates and a strong 64.1% coming ahead of top-line expectations.

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. This sub-par picture isn’t expected to improve in any meaningful way in the current period (Q3) either as the overwhelmingly negative of management guidance shows. Barring a few exceptions, most retailers guided lower for the current and coming quarters, causing Q3 estimates to fall sharply, as the chart below shows.


    
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The Q2 Scorecard (as of Friday morning, August 22nd)

Total earnings for the 490 S&P 500 members that have reported already are up +8.1% from the same period last year, with a ‘beat ratio’ of 65.5% and a median surprise of +2.6%. Total revenues are up +4.4%, with a very impressive revenue ‘beat ratio’ of 62.2% 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 as the recent Wal-Mart (WMT - Analyst Report), Target (TGT - Analyst Report) and other retailers’ reports show. 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 490 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.

Another way to look at the Q2 earnings season is to compare the growth rate thus far with what was expected at the start of the earnings season and the start of the quarter. For Q2, earnings for the S&P 500 were expected to be up +5.4% at the start of the quarter in early April, which fell to +3% growth by the time the earnings season got underway in early July. We wouldn’t close the books on the Q2 earnings season for another couple of weeks after accounting for all companies (10 S&P 500 members have still to report Q2 results). But the +8% earnings growth rate at this stage is unlikely to change materially.

The chart below shows that the final reported growth rate for each quarter (green shaded bars) are typically right around levels that were originally expected at the start of the (calendar) quarter. But Q2 doesn’t follow this pattern as the final growth rate for the quarter of around +8% is notably better than the +5.4% that was expected in early April.  


 
Tracking the Q2 earnings season for the small-cap companies – the S&P 600

Stock prices of small-cap stocks have been underwater this year, with the S&P 600 down -1.2% vs. a gain of +8.6% 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 22, we have seen Q2 results from 555 S&P 600 members or 92.5% of the index’s total members. Total earnings for these 555 companies are up +12.1% from the same period last year on +9.5% higher revenues, with 48.6% beating EPS estimates and 38.2% coming ahead of top-line expectations.  

In terms of comparison to other recent quarters, the earnings and revenue growth rates are better than what we have seen from the same group of 555 small-cap companies in 2014 Q1 as well as the average growth rate of the last four quarters. The beat ratios, both earnings and revenues, are lower compared to historical levels, as the chart below shows.

 

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 490 S&P 500 companies that have reported with estimates for the 10 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 Q2 earnings results 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 relatively 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-8/25

  • We will get the July New Home Sales numbers after the market opens, with expectations of a decent gain from June’s 406K level.

Tuesday -8/26

  • The July Durable Goods, the June Case-Shiller home price index and the August Consumer Confidence data is on the docket today.
  • Best Buy (BBY - Analyst Report) and Radio Shack (RSH - Analyst Report) are the notable earnings reports today, both in the morning.

Wednesday-8/27

Thursday -8/28

  • In addition to weekly Jobless Claims, we will get the first revision to Q2 GDP and the July Pending Home Sales numbers. The Q2 GDP growth number is expected to get revised to +3.9% from the original +4% rate.
  • Dollar General (DG - Analyst Report) and Signet Jewelers (SIG - Snapshot Report) are the key earnings reports today, both in the morning.

Friday-8/29

  • We will get the July Personal Income & Outlays, the August Chicago PMI and the final August University of Michigan Consumer Sentiment reports.

Here is a list of the 100 companies reporting this week, including 7 S&P 500 members.


 

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
ADEPT TECH INC ADEP 0.02 0 200 Monday AMC
CNINSURE IN-ADR CISG 0.1 0.07 55.56 Monday AMC
FABRINET FN 0.31 0.35 3.45 Monday AMC
IMMUNOMEDICS IMMU -0.13 -0.09 116.67 Monday AMC
IKANG HEALTHCR KANG 0.18 N/A -853.85 Monday AMC
OSI SYSTEMS INC OSIS 1.17 1.02 -10.26 Monday BTO
PREMIER INC-A PINC 0.31 N/A 0 Monday AMC
PROSPECT CAP CP PSEC 0.32 0.38 0 Monday AMC
QIHOO 360 TECH QIHU 0.33 0.26 17.65 Monday BTO
RENREN INC-ADR RENN -0.08 -0.02 -20 Monday AMC
ANALOG DEVICES ADI 0.63 0.57 5 Tuesday AMC
BEST BUY BBY 0.31 0.32 73.68 Tuesday BTO
ARUBA NETWORKS ARUN 0.06 -0.03 -115 Tuesday AMC
BANK MONTREAL BMO 1.51 1.6 8.7 Tuesday BTO
BANK OF NOVA SC BNS 1.29 1.32 7.5 Tuesday BTO
BOB EVANS FARMS BOBE 0.09 0.58 45.24 Tuesday AMC
DAKTRONICS INC DAKT 0.2 0.13 -50 Tuesday BTO
DSW INC CL-A DSW 0.3 0.49 -12.5 Tuesday BTO
DYCOM INDS DY 0.47 0.44 3.19 Tuesday AMC
GLOBE SPECIALTY GSM 0.16 0.09 -50 Tuesday AMC
HEICO CORP HEI 0.44 0.43 1.62 Tuesday AMC
MOVADO GRP INC MOV 0.55 0.44 -21.88 Tuesday BTO
NIMBLE STORAGE NMBL -0.28 N/A 12.5 Tuesday AMC
QAD INC-A QADA 0.06 0.08 -116.67 Tuesday AMC
QAD INC QADB 0.06 0.08 N/A Tuesday AMC
REGIS CORP/MN RGS 0.03 0.06 -150 Tuesday BTO
RADIOSHACK CORP RSH -0.59 -0.53 -81.48 Tuesday BTO
SANDERSON FARMS SAFM 3.86 2.95 31.55 Tuesday BTO
SOLERA HOLDINGS SLH 0.71 0.63 7.35 Tuesday AMC
SOC QUIMICA MIN SQM 0.38 0.41 -11.43 Tuesday AMC
SMITH & WESSON SWHC 0.25 0.4 10 Tuesday AMC
TAOMEE HOLDINGS TAOM -0.04 0.03 -75 Tuesday BTO
TECH DATA CORP TECD 0.79 N/A -20 Tuesday BTO
TIVO INC TIVO 0.07 -0.08 16.67 Tuesday AMC
TRINA SOLAR LTD TSL 0.14 -0.48 3700 Tuesday BTO
TUBEMOGUL INC TUBE -0.15 N/A N/A Tuesday AMC
WPP PLC WPPGY N/A N/A N/A Tuesday N/A
BROWN FORMAN B BF.B 0.73 0.66 5.08 Wednesday BTO
TIFFANY & CO TIF 0.86 0.83 25.97 Wednesday BTO
BIO REFERNC LAB BRLI 0.54 0.53 12.12 Wednesday BTO
BROWN SHOE CO BWS 0.34 0.33 12.9 Wednesday BTO
BALLY TECH INC BYI 1.23 0.95 -3.51 Wednesday AMC
CAREDX INC CDNA -0.13 N/A N/A Wednesday AMC
CHICOS FAS INC CHS 0.26 0.27 -10.34 Wednesday BTO
CASELLA WASTE CWST 0.01 -0.01 -25 Wednesday AMC
DONALDSON CO DCI 0.47 0.49 -1.52 Wednesday BTO
EXA CORP EXA -0.06 -0.06 -3075 Wednesday AMC
EXPRESS INC EXPR 0 0.2 -57.14 Wednesday BTO
GREIF INC GEF 0.84 0.84 -16.18 Wednesday AMC
GUESS INC GES 0.28 0.52 50 Wednesday AMC
GORDMANS STORES GMAN -0.16 0.05 -50 Wednesday AMC
SUNGY MOBILE GOMO 0.12 N/A -60 Wednesday AMC
LANNETT INC LCI 0.51 0.12 5 Wednesday AMC
MICHAELS COS MIK 0.08 N/A N/A Wednesday BTO
MEDICAL TRANSCR MTBC -0.05 N/A N/A Wednesday BTO
NORTH ATL DRILG NADL 0.28 0.28 -50 Wednesday BTO
NATL BK CDA NTIOF 1.02 1.16 3.23 Wednesday N/A
SEADRILL PTNRS SDLP 0.66 0.39 -20.93 Wednesday BTO
SEADRILL LTD SDRL 0.76 0.69 -15.71 Wednesday BTO
TILLYS INC TLYS 0.05 0.15 0 Wednesday AMC
TRUPANION INC TRUP -0.31 N/A N/A Wednesday AMC
VIMICRO INT-ADS VIMC -0.02 -0.2 -133.33 Wednesday BTO
VIOLIN MEMORY VMEM -0.34 N/A -36 Wednesday AMC
21VIANET GP-ADR VNET N/A 0.02 -316.67 Wednesday AMC
WORKDAY INC-A WDAY -0.29 -0.19 -93.33 Wednesday AMC
WILLIAMS-SONOMA WSM 0.53 0.49 9.09 Wednesday AMC
YINGLI GREEN EN YGE -0.17 -0.33 -40 Wednesday BTO
AVAGO TECHNOLOG AVGO 0.79 0.67 -3.85 Thursday AMC
DOLLAR GENERAL DG 0.83 0.77 -1.37 Thursday BTO
PALL CORP PLL 1.06 0.9 -2.41 Thursday BTO
AMER SOFTWARE A AMSWA 0.07 0.06 0 Thursday AMC
ABERCROMBIE ANF 0.1 0.16 5.56 Thursday BTO
AMIRA NATURE FD ANFI 0.16 0.21 48.39 Thursday AMC
BONA FILM-ADR BONA N/A 0.03 100 Thursday AMC
CDN IMPL BK CM 2.04 2.19 4.74 Thursday N/A
CHINA CORD BLD CO 0.05 0.07 0 Thursday AMC
COTY INC-A COTY 0.1 -0.05 111.11 Thursday BTO
CONSTELLIUM NV CSTM 0.57 0.33 -23.79 Thursday BTO
JIAYUAN.COM INT DATE 0.05 0.07 33.33 Thursday BTO
DESTINATION XL DXLG -0.03 -0.03 33.33 Thursday BTO
ESSILOR INTL SA ESLOY N/A N/A N/A Thursday N/A
FREDS INC FRED -0.18 0.09 -19.05 Thursday AMC
FRONTLINE LTD FRO -0.27 -0.5 0 Thursday BTO
STEALTHGAS INC GASS 0.12 0.15 0 Thursday BTO
GENESCO INC GCO 0.55 0.56 -10.99 Thursday BTO
IMPALA ADR IMPUY N/A N/A N/A Thursday N/A
CHINA NEPSTAR NPD N/A -0.01 N/A Thursday BTO
OMNIVISION TECH OVTI 0.37 0.42 -3.7 Thursday AMC
PAC SUNWEAR CAL PSUN -0.03 0.02 15.38 Thursday AMC
RALLY SOFTWARE RALY -0.46 -0.08 42.11 Thursday AMC
SHIP FIN INTL SFL 0.17 0.29 9.68 Thursday BTO
SIGNET JEWELERS SIG 0.99 0.84 -5.51 Thursday BTO
SPLUNK INC SPLK -0.33 -0.13 -600 Thursday AMC
LIBERTY TAX INC TAX -0.54 -0.46 -3.96 Thursday BTO
TORONTO DOM BNK TD 1 0.79 8.7 Thursday BTO
NET 1 UEPS TECH UEPS 0.31 0.26 40.63 Thursday AMC
VEEVA SYSTEMS-A VEEV 0.06 N/A -16.67 Thursday AMC
ZOES KITCHEN ZOES 0.02 N/A 33.33 Thursday AMC
BIG LOTS INC BIG 0.3 0.31 13.64 Friday BTO
PORTUGAL TELCOM PT N/A 0.39 N/A Friday N/A

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