Halloween Comes Early
Important note: Keep your focus on the trends in estimates, not on the levels! An estimate in motion tends to stay in motion. Estimates are dropping rapidly, and nearly across the board. This means that the currently measured expectations for the fourth quarter and for 2009 are far too high.
The growth rate expected for 2009 has been sustained by the expectations for 2008 dropping at a similar rate. Versus the stable base of 2007 earnings the expected growth rate has declined from 14.1% to 12.4% in just the past week.
It is my personal expectation that that number will fall below 0.0% by Christmas. Similarly, due to a very weak 4Q in 2007, year over year growth in total net income is now expected to be 17.7%, but this is down from 19.2% just last week.
The fact that the revisions ratios for 2008 are deeply in negative territory in the face of more positive than negative surprises is a very negative development.
Scorecard and Median EPS Growth Rates
- 266 or 53.2% of S&P Companies have reported through Oct 28 close
- Surprise ratio at 1.96, median surprise at 1.87%, both somewhat below normal
- Median EPS growth at 6.78% and is surprisingly good given the economic environment
- Energy (14 firms, up 21.7%) and Health Care (34 firms, up 15.1%) leading in early results
- Financials (50 firms, down 48.6%) doing the worst
- Expected Growth of 9.2% for those left to report
- Health Care leading on surprise front, Financials disappointing
Positives:
Amgen Inc (AMGN - Analyst Report) reported EPS of $1.21 versus expectations of $1.06, and EPS of $1.06 last year.
EMC Corporation (EMC - Analyst Report) reported EPS of $0.21 versus expectations of $0.18 and EPS of $0.17 last year.
National Oilwell Varco Inc (NOV - Analyst Report) reported EPS of $1.44 versus expectations of $1.30 and EPS of $1.02 last year.
Valero Energy Corporation (VLO - Analyst Report) reported EPS of $1.86 versus expectations of $1.24 and EPS of $1.40 last year
Negatives:
Ashland Inc (ASH - Snapshot Report) reported a loss of $0.01 per share versus expected EPS of $0.23 and EPS of $0.51 last year
Masco Corporation (MAS - Analyst Report) reported EPS of $0.10 versus expectations of $0.17 and EPS of $0.57 last year
Pulte Homes Inc. (PHM - Snapshot Report) reported a loss of $1.11 per share much worse than the expected loss of $0.50 and positive earnings of $0.21 per share last year
Terex Corporation (TEX - Analyst Report) reported EPS of $1.08 versus expectations of $1.33 and EPS of $1.45 last year
Keep in mind that median growth rates are inherently equally weighted, so the growth rate for Cabot Oil and Gas (COG - Analyst Report) is just as significant to the results for the Energy sector as the growth rate for Exxon (XOM - Analyst Report).
Share repurchases were still very significant in the fourth quarter of last year and the first quarter of this year (the data is not out yet for the second quarter) and the reduction in share count also boosts EPS growth.
Currency translation gains will be less of a factor this quarter due to the rebound in the dollar. However, the strong overseas demand that the previously very weak dollar stimulated will still prove to be a boost to the earnings of many firms. The delay is because in the third quarter they will be shipping goods ordered previously. Given both the rebound in the dollar and the very significant economic slowdown abroad, look for the export boom to fade in the fourth quarter and into 2009.
| Sector | Q3 08 Median Growth Rep. | Q4 08 Median Proj. Growth. | 2007 Median Rep. Growth | 2008 Median Proj. Growth | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match |
| Energy | 21.69% | 19.82% | 23.15% | 21.95% | 37.50% | 1.43% | 11 | 3 | 1 |
| Healthcare | 15.07% | 13.06% | 18.79% | 13.09% | 64.15% | 4.00% | 25 | 4 | 5 |
| Tech | 12.92% | -2.08% | 7.35% | 7.65% | 54.05% | 2.86% | 23 | 12 | 5 |
| Industrial | 11.11% | 3.77% | 14.57% | 12.19% | 71.93% | 2.11% | 27 | 12 | 2 |
| Cons. Disc. | 7.32% | -1.19% | 11.21% | -1.82% | 45.68% | 2.48% | 23 | 7 | 7 |
| Cons. Stap. | 6.59% | 1.85% | 10.69% | 7.43% | 48.78% | 2.22% | 14 | 4 | 2 |
| Materials | 5.30% | -1.22% | 9.31% | 1.89% | 66.67% | 1.41% | 13 | 6 | 1 |
| Utilities | 1.63% | 0.00% | 7.28% | 4.85% | 16.13% | -6.14% | 2 | 3 | 0 |
| Telecom | -4.13% | 0.20% | 9.16% | 6.85% | 44.44% | -3.42% | 0 | 3 | 1 |
| Financial | -48.57% | 6.46% | -4.98% | -15.03% | 59.52% | -3.27% | 21 | 27 | 2 |
| S&P 500 | 6.78% | 2.56% | 11.11% | 6.64% | 53.20% | 1.87% | 159 | 81 | 26 |
| Sector | Q3 08 Proj. Growth | Q4 08 Proj. Growth | 2007 Rep. Growth | 2008 Proj. Growth | 2009 Proj. Growth |
||
| Energy | 37.50% | 14.41% | 11.75% | 32.62% | 2.89% | ||
| Industrial | 24.71% | 12.13% | 20.06% | 9.78% | 9.09% | ||
| Tech | 20.69% | 7.49% | 21.95% | 14.54% | 12.89% | ||
| Healthcare | 13.25% | 20.25% | 16.72% | 12.17% | 11.79% | ||
| Cons. Stap. | 12.70% | 10.07% | 12.89% | 11.20% | 9.02% | ||
| Telecom | 12.50% | -11.11% | -2.94% | -6.31% | 0.72% | ||
| Utilities | 8.05% | 9.30% | 9.18% | 5.80% | 7.54% | ||
| Materials | 6.69% | -7.97% | 9.70% | -1.30% | 9.61% | ||
| Financial | -1.72% | 1.05% | 13.89% | -7.60% | 8.25% | ||
| Cons. Disc. | -4.24% | -2.98% | 7.45% | 2.06% | 7.18% | ||
| S&P 500 | 9.20% | 9.23% | 13.53% | 8.09% | 9.35% | ||
Total Net Income Growth
- Total net income of those that have reported down 18.8% from last year
- Total reported net income so far $102.6 billion versus $126.3 billion for same firms last year
- Those firms earned $113.1 billion in the second quarter
- Results exclude non-recurring items, most of which have been negative
- Combining results with expectations, earnings now expected to be down 13.7% year over year, which seems very optimistic
- Financials down 104.2% so far, a decline of 99.3% expected when all is said and done
- Excluding Financials, earnings are up 6.68% so far
- Five sectors expected to post lower total earnings than a year ago
- Energy is the only sector expected to post robust growth, up 47.7%, Staples next best up 5.8%
- Tech and Consumer Discretionary doing well in early results, but expected to fade
- Expectations for the fourth quarter drop to up 17.7% from 19.2% on Thursday, and 21.8% a week ago, still looks very optimistic to me.
- Full year net income in 2009 expected to be 12.4% above 2007 levels. Count me as extremely skeptical, I think earnings in 2009 will likely be lower than in 2008
| Sector | Q1 08 Rep. Growth | Q2 08 Rep. Growth | Q3 08 Rep. Growth | Q4 08 Proj. Growth | 2007 Rep. Growth | 2008 Proj. Growth | 2009 Proj. Growth |
|
| Energy | 12.03% | 11.25% | 38.99% | 6.25% | 5.39% | 24.06% | 1.35% | |
| Cons. Disc. | -31.16% | -3.31% | 13.33% | -3.98% | -20.47% | 12.69% | 17.67% | |
| Technology | 11.84% | 22.61% | 11.90% | -5.35% | 24.60% | 12.88% | 12.08% | |
| Cons. Stap. | 12.14% | -8.15% | 7.66% | 0.36% | 3.97% | 9.39% | 7.52% | |
| Health Care | 3.40% | 8.64% | 6.54% | -1515.20% | 19.41% | 9.72% | 8.16% | |
| Materials | 16.62% | 5.29% | 3.42% | -5.39% | 14.73% | 3.29% | -2.92% | |
| Industrial | 8.11% | 4.30% | -1.68% | -7.97% | 13.69% | 2.10% | 2.51% | |
| Utilities | 5.48% | 6.90% | -3.21% | 6.66% | 15.34% | 5.45% | 6.04% | |
| Telecom | 9.38% | 7.52% | -6.15% | -5.74% | 23.87% | 5.17% | 4.44% | |
| Financials | -68.81% | -75.64% | -104.20% | -312.49% | -26.59% | -77.77% | 268.29% | |
| S&P | -18.12% | -18.53% | -18.80% | 27.29% | -0.51% | -12.24% | 22.98% | |
| Sector | Q3 08 Income | Q3 07 Income | Q2 08 Income | Q2 07 Income |
||
| Health Care | $22,098 | $20,742 | $21,506 | $19,796 | ||
| Industrial | $19,471 | $19,803 | $20,775 | $19,917 | ||
| Technology | $17,349 | $15,504 | $17,019 | $13,880 | ||
| Energy | $13,750 | $9,892 | $13,169 | $11,838 | ||
| Cons. Stap. | $10,129 | $9,408 | $8,654 | $9,422 | ||
| Cons. Disc. | $7,030 | $6,203 | $5,420 | $5,606 | ||
| Telecom | $6,045 | $6,441 | $6,744 | $6,272 | ||
| Materials | $5,273 | $5,098 | $7,243 | $6,879 | ||
| Utilities | $2,680 | $2,770 | $2,000 | $1,871 | ||
| Financials | ($1,263) | $30,452 | $10,551 | $43,313 | ||
| S&P | $102,561 | $126,312 | $113,080 | $138,793 | ||
| Sector | Q1 08 Rep. Growth | Q2 08 Rep. Growth | Q3 08 Proj. Growth | Q4 08 Proj. Growth | 2007 Rep. Growth | 2008 Proj. Growth | 2009 Proj. Growth |
|
| Energy | 32.80% | 20.67% | 53.82% | 9.96% | 6.17% | 36.30% | 0.63% | |
| Industrials | -5.04% | 18.51% | 13.10% | 8.51% | 1.10% | 15.68% | 11.41% | |
| Cons. Stap. | 11.84% | 13.49% | 5.31% | 14.22% | 19.55% | 14.55% | 8.65% | |
| Health Care | 5.38% | 7.37% | 4.95% | 12.43% | 16.70% | 11.63% | 13.30% | |
| Utilities | 10.07% | 2.36% | -3.43% | 2.92% | 8.46% | 6.07% | 9.77% | |
| Technology | 10.48% | 0.80% | -7.46% | -1.02% | 19.38% | 9.39% | 15.27% | |
| Materials | 15.23% | 2.00% | -13.83% | -20.33% | 6.05% | -1.71% | 13.95% | |
| Cons. Disc. | -13.18% | -79.34% | -51.59% | -36.38% | 3.64% | -36.85% | 43.91% | |
| Telecom | -49.01% | -49.05% | -57.40% | -60.30% | -9.20% | -50.87% | -6.50% | |
| Financials | -83.22% | -55.90% | -86.75% | 143.63% | 7.14% | -56.31% | 77.60% | |
| S&P | -3.70% | -12.99% | -5.15% | 6.22% | 9.37% | 0.62% | 14.42% | |
| Sector | Q1 08 Rep. Growth | Q2 08 Rep. Growth | Q3 08 Proj. Growth | Q4 08 Proj. Growth | 2007 Rep. Growth | 2008 Proj. Growth | 2009 Proj. Growth |
|
| Energy | 26.00% | 17.56% | 48.95% | 8.81% | 5.92% | 32.42% | 0.84% | |
| Cons. Stap. | 11.98% | 3.20% | 6.39% | 8.51% | 11.97% | 12.22% | 8.15% | |
| Health Care | 3.70% | 8.44% | 6.30% | 4.43% | 18.98% | 10.02% | 8.97% | |
| Technology | 11.29% | 13.87% | 4.21% | -3.84% | 22.59% | 11.57% | 13.26% | |
| Industrials | 5.84% | 6.18% | 0.23% | -5.96% | 11.80% | 3.94% | 3.85% | |
| Materials | 16.43% | 4.78% | -0.45% | -8.92% | 13.13% | 2.43% | -0.13% | |
| Utilities | 8.90% | 3.79% | -3.37% | 3.94% | 10.39% | 5.89% | 8.68% | |
| Cons. Disc. | -19.53% | -57.00% | -22.20% | -26.03% | -6.13% | -19.85% | 31.25% | |
| Telecom | -49.01% | -49.05% | -57.40% | -60.30% | -9.20% | -50.87% | -6.50% | |
| Financials | -71.98% | -71.27% | -99.28% | -601.58% | -19.30% | -71.61% | 184.11% | |
| S&P | -12.90% | -16.46% | -13.66% | 17.73% | 3.06% | -7.31% | 19.42% | |
The Zacks Revisions Ratio: 2008
- Revisions ratio for full S&P 500 up to 0.27, from 0.23 last Thursday
- Health Care by far the strongest at 1.18 in response to earnings surprises
- Health Care accounts for 26% of all estimate increases, revisions ratio 0.21 excluding Health Care
- Cuts outnumber increases by more than 3:1 in 8 of 10 sectors
- Ratio of firms with rising to falling mean estimates at 0.23, down from 0.24
- Total number of revisions (4 week total) up to 3,274 from 2,650 on Tuesday
- Increases up to 695 from 493, cuts up to 2,579 from 2,157
To help gauge the direction of the market, we take note of what analysts are thinking. By tallying their EPS changes, we can determine our "revisions ratio". This ratio simply divides the total number of positive estimate revisions by the total number of estimate cuts. Thus, a high ratio is a bullish indicator and a low ratio is bearish.
For the S&P 500 as a whole, a number below 0.80 or above 1.25 is generally significant. With smaller totals for any given sector than the S&P 500 over all, the ratio should be farther away from 1.0 to be truly significant. However, for the sake of consistency, we refer to readings above 1.25 as being in positive territory and below 0.80 as being in negative territory.
| Avg. 4wk EPSChange (FY08) | Avg. 4wk EPS Change (FY08) | Revisions Ratio | Firms With FY08 EPS Increase | Firms With FY08 EPS Decrease |
| Health Care | -1.55% | 1.18 | 25 | 27 |
| Industrials | -2.11% | 0.45 | 16 | 41 |
| Consumer Staple | -0.88% | 0.32 | 10 | 30 |
| Energy | -1.57% | 0.21 | 6 | 34 |
| Technology | -5.63% | 0.20 | 9 | 62 |
| Utilities | -0.89% | 0.19 | 3 | 27 |
| Financial Services | -9.29% | 0.17 | 14 | 69 |
| Materials | -5.57% | 0.16 | 1 | 29 |
| Consumer Disc | -4.75% | 0.13 | 8 | 69 |
| Telecom | -2.56% | 0.07 | 0 | 9 |
| S&P 500 | -4.17% | 0.27 | 92 | 397 |
The Zacks Revisions Ratio: 2009
- Full S&P 500 2009 revisions ratio up to 0.13 from 0.12 on Thursday
- More than 7 cuts per increase for 7 sectors
- Health Care the "best" at a 0.50 reading
- Ratio of rising to falling mean estimates down to 0.13 from 0.16
- Total number of revisions up to 3,239 from 2,567 from last Tuesday
- Increases up to 362 from 274, cuts up to 2,877 from 2,293
- Only thing holding up 2009 expected growth is the decline of 2008 base
| Avg. 4wk EPSChange (FY09) | Avg. 4wk EPS Change (FY09) | Revisions Ratio | Firms With FY09 EPS Increase | Firms With FY09 EPS Decrease |
| Health Care | -1.23% | 0.50 | 19 | 31 |
| Consumer Staples | -1.43% | 0.17 | 8 | 31 |
| Industrials | -7.55% | 0.14 | 5 | 47 |
| Telecom | -8.40% | 0.12 | 2 | 7 |
| Utilities | -2.20% | 0.10 | 3 | 25 |
| Financial Services | -12.55% | 0.09 | 6 | 77 |
| Energy | -11.39% | 0.09 | 1 | 39 |
| Technology | -8.40% | 0.08 | 4 | 69 |
| Consumer Discr | -11.74% | 0.06 | 5 | 71 |
| Materials | -13.16% | 0.05 | 2 | 27 |
| S&P 500 | -8.32% | 0.13 | 55 | 424 |
Market Cap versus Total Earnings
- S&P 500 down to 11.8x 2008, and 9.9x 2009 currently expected earnings
- Forward earnings yield of 9.62% wildly attractive relative to 10 year T-note of 3.91%
- Real P/Es are higher (and earnings yields lower) since the "E" is still way to high
- Financials expected to get 6.6% of total S&P earnings in 2008, down from 21.6% in 2007; rebound to 15.7% expected for 2009, currently represent 14.2% of total market cap
- Energy’s share expected to grow to 22.2% of total in 2008 from 15.6% in 2007, expected to recede to 18.8% in 2009. Sector represents just 12.2% of the index market cap
- All sectors but Financials and Consumer Discretionary expected to lose earnings share in 2009, although both will be below 2007 shares
- Energy P/E by far the lowest for both 2008 and 2009, at 6.5x and 6.5x, respectively
When making investment decisions, growth should always be looked at in conjunction with how much you are paying for a stock. Thus, it makes sense to look at the total earnings expected for a sector, relative to that sector’s total market capitalization. This is basically a variation on looking at the P/E. The P/E’s are calculated as the total Market Capitalization of the sector divided by the total expected earnings for the sector.
| Sector | 2007 Growth | 2008 Growth | 2009 Growth | Market Cap Growth | P/E FY08 | P/E FY09 |
| Technology | 12.68% | 15.23% | 14.41% | 16.62% | 12.91 | 11.44 |
| Cons Staple | 9.79% | 11.87% | 10.74% | 14.27% | 14.23 | 13.18 |
| Financials | 21.55% | 6.60% | 15.72% | 14.17% | 25.42 | 8.95 |
| Health Care | 11.83% | 14.05% | 12.84% | 13.76% | 11.59 | 10.64 |
| Energy | 15.56% | 22.24% | 18.81% | 12.23% | 6.51 | 6.45 |
| Industrials | 11.14% | 12.50% | 10.88% | 10.48% | 9.91 | 9.55 |
| Cons Disc. | 6.95% | 5.98% | 6.55% | 8.26% | 16.34 | 12.51 |
| Utilities | 3.35% | 3.83% | 3.49% | 3.77% | 11.67 | 10.74 |
| Telecom | 3.60% | 3.77% | 3.28% | 3.42% | 10.72 | 10.34 |
| Materials | 3.55% | 3.92% | 3.28% | 3.02% | 9.12 | 9.14 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 11.83 | 9.92 |
Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Tuesday 10/28/2008