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Early Q4 Reports Are Ugly
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ShareHighlighted stocks include: 3M Company (MMM - Analyst Report), Broadcom Corporation (BRCM - Analyst Report), Citigroup Inc. (C - Analyst Report), Hewlett-Packard Company (HPQ - Analyst Report), Goldman Sachs Group (GS - Analyst Report), Morgan Stanley (MS - Analyst Report), State Street Corporation (STT - Analyst Report)
Key Points:
- Keep your eye on trends, not levels when it comes to Estimate Data
- Earnings expectations are collapsing for both the fourth quarter and 2009
- 17 firms have reported 4Q EPS, off to a bad start
- Just when you think it can’t get any worse, it does
- All areas affected - 2009 cuts running more than 12:1 over increases
- Current expectations of 11.4% growth in 2009 are borderline delusional
- P/Es based on 2009 estimates will prove to be to low as "E" plunges
- Energy only source of significant growth in 3Q, will fade in the fourth quarter and 2009
- Total expected net income for 2009 down 10.1% over last month
Total Net Income Growth
- Total net income expected to fall 6.7% in fourth quarter
- Negative year-over-year growth in fourth quarter now expected for 6 sectors
- Financials currently expected to swing into the black from losing money last year
- Consumer Staples expected to post 16.2% growth
- Full year net income in 2009 expected to be down 4.6% from 2007 levels, down from -2.0% growth a week ago.
- Full-year total net income expected to be 11.4% higher in 2009 than in 2008 (not going to happen)
- Excluding Financials (easy comps), total net income expected to be down 2.5% from 2008 levels
- The current projections look extremely optimistic to me
- Early returns very ugly, the 17 that have reported are down 96.1% in aggragate from a year ago (mostly Goldman Sachs Group (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report)).
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 A | Q1 '09 E | 2007 A | 2008 A | 2009 E |
| Technology | 21.80% | 28.60% | 8.36% | -1.52% | 48.93% | 7.43% | 11.18% |
|
Materials | -25.41% | -22.27% | 2.92% | -49.77% | -0.98% | -29.78% | 14.79% |
|
Cons. Stap. | 13.95% | 0.68% | 2.91% | -15.61% | 26.80% | -1.45% | 7.81% |
|
Cons. Disc. | -2.16% | 20.04% | -8.08% | -18.49% | 0.80% | 0.88% | 12.59% |
|
Financials | -32.12% | -45.92% | -2614.42% | -60.59% | -58.57% | -0.81% | 27.68% |
|
S&P | -12.39% | -14.73% | -96.07% | -32.23% | -19.28% | 0.02% | 15.56% |
|
|
| Sector | Q4 '08 | Q4 '07 | Q3 '08 | Q3 '07 | |||
| Technology | $2,218 | $2,047 | $1,942 | $1,510 | |||
| Cons. Disc. | $986 | $1,073 | $2,287 | $1,905 | |||
| Cons. Stap. | $951 | $924 | $869 | $863 | |||
| Materials | $493 | $479 | $384 | $494 | |||
| Financials | ($4,477) | ($178) | $2,450 | $4,530 | |||
| S&P | $171 | $4,345 | $7,932 | $9,302 | |||
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 E | Q1 '09 E | 2007 A | 2008 E | 2009 E | |
| Cons. Stap. | 1.58% | 13.92% | 16.81% | -6.99% | 11.44% | 12.97% | 4.85% | |
| Health Care | 8.71% | 6.74% | 2.37% | 0.60% | 18.79% | 9.37% | 7.33% | |
| Utilities | 6.78% | -7.42% | 2.10% | 0.53% | 10.82% | 4.35% | 6.17% | |
| Energy | 17.56% | 57.03% | -14.54% | -31.11% | 5.81% | 27.11% | -21.35% | |
| Telecom | -3.69% | -15.68% | -15.47% | -1515.20% | 16.70% | -4.45% | -0.02% | |
| Industrial | 7.12% | 1.63% | -17.18% | -13.46% | 12.52% | 0.17% | -5.99% | |
| Technology | 15.92% | 4.44% | -20.87% | -14.94% | 25.54% | 0.64% | 5.57% | |
| Materials | 5.14% | 0.23% | -34.25% | -37.37% | 13.18% | -6.28% | -18.82% | |
| Cons. Disc. | -62.85% | -52.93% | -54.68% | -49.65% | -6.73% | -40.87% | 20.98% | |
| Financials | -75.79% | -127.36% | -425.90% | 83.03% | -22.72% | -91.91% | 707.15% | |
| S&P | -16.31% | -17.51% | -4.20% | -10.94% | 2.35% | -15.28% | 11.25% | |
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 E | Q1 '09 E | 2007 A | 2008 E | 2009 E | |
| Cons. Stap. | 2.01% | 13.34% | 16.15% | -7.39% | 12.04% | 12.34% | 4.96% | |
| Health Care | 8.71% | 6.74% | 2.37% | 0.60% | 18.79% | 9.37% | 7.33% | |
| Utilities | 6.78% | -7.42% | 2.10% | 0.53% | 10.82% | 4.35% | 6.17% | |
| Energy | 17.56% | 57.03% | -14.54% | -31.11% | 5.81% | 27.11% | -21.35% | |
| Telecom | -3.69% | -15.68% | -15.47% | -1515.20% | 16.70% | -4.45% | -0.02% | |
| Industrial | 6.25% | 1.11% | -16.78% | -14.15% | 12.19% | -0.47% | -5.67% | |
| Technology | 16.48% | 5.88% | -18.95% | -13.90% | 27.15% | 1.19% | 6.05% | |
| Materials | 5.14% | 0.23% | -34.25% | -37.37% | 13.18% | -6.28% | -18.82% | |
| Cons. Disc. | -58.72% | -43.68% | -51.28% | -46.27% | -6.04% | -36.74% | 19.66% | |
| Financials | -71.72% | -118.61% | -292.41% | 52.11% | -25.37% | -88.18% | 473.73% | |
| S&P | -16.13% | -17.39% | -6.65% | -11.91% | 1.46% | -14.78% | 11.41% | |
Scorecard and Median EPS Growth Rates
- Median EPS growth of 17 firms reporting so far is 2.6%
- Surprise ratio 2.20, median surprise 3.8%
- Median EPS growth expected to be -3.1 in the first Quarter
- Health Care expected to lead in both quarters, only sector above 6% in either
- Seven sectors expected to show negative growth in the fourth quarter
- Materials (-26.6%) and Consumer Discretionary (-25.0%) expected to be the worst.
- Six sectors expected to show negative growth in 2009
- No sector is expected to post double digit growth in 2009
Keep in mind that median growth rates are inherently equally weighted, so the growth rate for Cabot Oil & Gas Corporation (COG - Analyst Report) is just as significant to the results for the Energy sector as the growth rate for Exxon Mobil Corporation (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 | 4Q '08 (A) | 1Q '09 (E) | 2007 (A) | 2008 (E) | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match |
| Cons. Stap. | 10.17% | 0.00% | 10.65% | 9.84% | 7.32% | 11.48% | 3 | 0 | 0 |
| Tech | 5.42% | -3.57% | 20.27% | -6.29% | 5.48% | 0.26% | 2 | 2 | 0 |
| Industrial | 2.60% | -57.14% | -13.37% | -28.80% | 1.72% | 0.00% | 0 | 0 | 1 |
| Cons. Disc. | 1.24% | -7.64% | 9.67% | 0.42% | 7.50% | 5.70% | 6 | 0 | 0 |
| Financial | -147.50% | -54.18% | -37.71% | 74.83% | 3.57% | -235.70% | 0 | 3 | 0 |
| S&P 500 | 2.60% | -8.75% | 7.51% | 2.10% | 3.40% | 3.77% | 11 | 5 | 1 |
| Sector | 4Q '08 (E) | 1Q '09 (E) | 2007 (A) | 2008 (E) | 2009 (E) |
| Healthcare | 10.13% | 7.32% | 17.60% | 11.68% | 9.56% |
| Utilities | 3.41% | 3.76% | 9.18% | 3.63% | 5.82% |
| Cons. Stap. | 2.58% | 5.26% | 11.08% | 5.82% | 6.85% |
| Energy | -0.87% | -1.56% | 13.31% | 23.15% | -12.50% |
| Industrial | -1.25% | -6.59% | 16.92% | 9.08% | -0.13% |
| Financial | -2.28% | -9.67% | 6.15% | -16.05% | -0.62% |
| Telecom | -5.63% | 0.00% | -2.94% | 4.84% | -1.90% |
| Tech | -10.53% | -11.81% | 18.97% | -0.30% | 7.01% |
| Cons. Disc. | -25.00% | -11.36% | 8.77% | -5.65% | -3.88% |
| Materials | -26.63% | -20.71% | 9.70% | -1.55% | -1.26% |
| S&P 500 | -4.17% | -3.03% | 12.78% | 3.67% | 3.10% |
The Zacks Revisions Ratio: 2008
- Revisions ratio for full S&P 500 down to 0.15, from 0.17 last week
- Every sector but Telecom and Utilities has at least 3 cuts per increase
- 8 sectors have at least 4 cuts for every increase
- 46 firms see mean estimate decline by more than 10%
- Ratio of firms with rising to falling mean estimates at 0.27, up from 0.21
- Total number of revisions (4-week total) falls to 1,808 from 1,886 (-4.1%)
- Increases down to 242 from 269 (-10.0%), cuts down to 1,566 from 1,627 (4.4%)
- Past the seasonal peak of total revisions activity
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 |
| Telecom | -0.10% | 1.14 | 2 | 7 |
| Utilities | -0.90% | 0.63 | 14 | 12 |
| Consumer Staple | -0.96% | 0.31 | 13 | 27 |
| Health Care | -0.38% | 0.23 | 14 | 38 |
| Consumer Disc | -4.64% | 0.21 | 16 | 54 |
| Energy | -0.77% | 0.16 | 8 | 32 |
| Technology | -6.43% | 0.14 | 11 | 60 |
| Financial Services | -4.82% | 0.13 | 13 | 67 |
| Industrials | -2.68% | 0.04 | 5 | 48 |
| Materials | -3.09% | 0.03 | 0 | 26 |
| S&P 500 | -3.20% | 0.15 | 96 | 371 |
The Zacks Revisions Ratio: 2009
- Full S&P 500 2009 revisions ratio at 0.08, down from 0.11 last week
- More than 6 cuts per increase for all 10 sectors, more than 12 per increase in 6 sectors
- Just 1 estimate raised in Materials sector versus 94 cuts
- Staples the "best" at a 0.16 reading
- Ratio of rising to falling mean estimates up to 0.17 from 0.11
- Total number of revisions down to 1,967 from 1,916 last week (+2.8%)
- Increases steady at 143 (unch), cuts up to 1,824 from 1,773 (+2.9%)
- Unusual to see total revisions activity rise at this point in the season
- Size of cuts horrific: 22% of all S&P firms' 2009 estimates down more than 10% over last 4 weeks, 9.4% down more than 20%
- Only thing holding up 2009 expected growth is the decline of 2008 base
- Stocks with Positive revisions activity: HPQ, STT
- Stocks with Negative Revisions activity (almost all but highlight): BRCM, C, MMM
Positive Revisions:
Hewlett-Packard Company (HPQ - Analyst Report) had 3 estimate increases versus 1 cut. These revisions raised the consensus earnings estimate by 1.8%
State Street Corporation (STT - Analyst Report) had 5 increases versus one cut. The consensus earnings estimate rose by 1.8%.
Negative Stocks (think of these as representative of their areas)
Broadcom Corporation (BRCM - Analyst Report) had 21 estimate cuts and no increases, slashing its mean estimate by 90.1%
Citigroup Inc. (C - Analyst Report) had no increases and 10 cuts. The company's consensus earnings estimate fell 70.1%.
3M Company (MMM - Analyst Report) saw 10 cuts versus and no increases. This resulted in a 19.6% decline in the consensus earnings estimate.
| Avg. 4wk EPSChange (FY09) | Avg. 4wk EPS Change (FY09) | Revisions Ratio | Firms With FY09 EPS Increase | Firms With FY09 EPS Decrease |
| Consumer Staples | -2.07% | 0.16 | 9 | 32 |
| Telecom | -5.55% | 0.15 | 3 | 6 |
| Health Care | -2.38% | 0.11 | 15 | 36 |
| Consumer Discr | -6.65% | 0.11 | 4 | 70 |
| Technology | -9.94% | 0.08 | 8 | 63 |
| Financial Services | -9.34% | 0.08 | 12 | 68 |
| Energy | -11.07% | 0.05 | 0 | 40 |
| Industrials | -6.91% | 0.05 | 5 | 49 |
| Utilities | -2.89% | 0.04 | 6 | 25 |
| Materials | -9.35% | 0.01 | 5 | 21 |
| S&P 500 | -6.99% | 0.08 | 67 | 410 |
Market Cap versus Total Earnings
- S&P 500 P/E for 2008 12.2x and 10.9x for 2009
- Forward Earnings Yield of 9.17% wildly attractive relative to 10 year T-Note of 2.07%
- Real P/E’s are higher (and earnings yields lower) since the “E” is still way to high
- Financials expected to get 3.1% of total S&P earnings in 2008, down from 21.3% in 2007, rebound to 15.2% expected for 2009, currently represent 12.8% of total market cap
- Energy’s share expected to grow to 23.2% of total in 2008 from 15.5% in 2007, expected to recede to 16.4% in 2009. Sector represents just 12.8% 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 6.7x and 8.6x, 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% | 2008% | 2009% | Market Cap% | P/E 08 | P/E 09 |
| Technology | 12.89% | 15.38% | 14.64% | 15.88% | 12.57 | 11.85 |
| Health Care | 11.95% | 15.33% | 14.77% | 14.37% | 11.41 | 10.63 |
| Cons Staple | 9.62% | 12.68% | 11.94% | 14.12% | 13.56 | 12.92 |
| Financials | 21.30% | 3.08% | 15.21% | 12.80% | 50.64 | 9.19 |
| Energy | 15.53% | 23.16% | 16.35% | 12.79% | 6.72 | 8.55 |
| Industrials | 11.19% | 13.07% | 11.07% | 10.58% | 9.85 | 10.44 |
| Cons Disc. | 6.98% | 5.18% | 5.56% | 8.83% | 20.76 | 17.35 |
| Utilities | 3.42% | 4.18% | 3.98% | 3.96% | 11.54 | 10.87 |
| Telecom | 3.63% | 4.08% | 3.66% | 3.66% | 10.93 | 10.92 |
| Materials | 3.50% | 3.85% | 2.81% | 3.01% | 9.53 | 11.74 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 12.18 | 10.93 |
Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Thursday 12/18/2008
Read the full analyst report on MMM
Read the full analyst report on HPQ
Read the full analyst report on MS
Read the full analyst report on C
Read the full analyst report on STT
Read the full analyst report on GS
Read the full analyst report on BRCM
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