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New Fears for the New Year
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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
- 21 firms have reported fourth-quarter EPS, the results are off to a very bad start
- Total net income reported down 97% so far year-over-year
- All areas affected - 2009 cuts running more than 12:1 over increases
- Current expectations of 8.3% 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 the third quarter, will fade in the fourth quarter and 2009
- Total expected net income for 2009 down 8.4% over last month
Total Net Income Growth
- Total net income expected to fall 10.6% in fourth quarter from a year ago
- Negative year-over-year growth in 4Q now expected for six sectors
- Financials currently expected to swing into the black from losing money last year (shows up as -239% in the table)
- Consumer Staples expected to post 14.2% growth; Utilities and Health Care are slightly positive
- Full year net income in 2009 expected to be down 4.7% from 2007 levels
- Full year total net income expected to be 8.4% higher in 2009 than in 2008 (not going to happen, was 11.4% two weeks ago)
- Excluding Financials (easy comps), total net income expected to be down 4.8% from 2008 levels
- The current projections look extremely optimistic to me
- Early returns are very ugly. The 21 companies that have reported (November fiscal period ends) are down 97.0% in aggregate from a year ago (mostly Goldman Sachs (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report)). 98.3% lower than the third quarter.
- Year-over-year growth expected for the first quarter plunged to -15.6% from -11.9% two weeks ago
- First peak at 2010 expectations looks for 20.2% growth over 2009
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 A | Q1 '09 E | 2007 A | 2008 A | 2009 E | 2010 E |
| Industrial | -22.23% | -19.55% | 0.53% | -50.00% | 12.04% | -11.22% | -25.34% | 9.79% |
|
Cons. Stap. | 9.65% | 4.12% | -1.53% | -10.82% | 12.42% | 5.46% | 5.12% | 8.20% |
|
Cons. Disc. | -2.16% | 20.04% | -8.08% | -23.95% | -0.14% | 1.62% | -4.53% | 7.66% |
|
Technology | 24.08% | 26.50% | -8.36% | -15.67% | 6.91% | 15.22% | -2.35% | 21.36% |
|
Financials | -32.12% | -45.92% | -96.02% | -67.56% | -18.48% | -70.11% | 49.01% | 43.99% |
|
S&P | -11.57% | -14.28% | -96.96% | -37.65% | -5.28% | -25.53% | 5.14% | 20.31% |
|
|
| Sector | Q4 '08 | Q4 '07 | Q3 '08 | Q3 '07 | |||
| Technology | $1,710 | $1,866 | $1,793 | $1,417 | |||
| Cons. Stap. | $1,359 | $1,380 | $1,312 | $1,260 | |||
| Cons. Disc. | $986 | $1,073 | $2,287 | $1,905 | |||
| Industrial | $565 | $562 | $463 | $575 | |||
| Financials | ($4,477) | ($178) | $2,450 | $4,530 | |||
| S&P | $143 | $4,703 | $8,304 | $9,688 | |||
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 E | Q1 '09 E | 2010 E | 2009 E | 2008 E | 2007 A |
| Cons. Stap. | 1.49% | 13.97% | 15.42% | -6.89% | 9.57% | 10.72% | 11.17% | 6.80% |
| Utilities | 7.13% | -6.70% | 2.83% | 2.18% | 10.86% | 5.52% | 3.82% | 11.39% |
| Health Care | 8.84% | 7.09% | 2.29% | 0.41% | 9.48% | 8.15% | 7.76% | 19.56% |
| Telecom | -3.69% | -15.68% | -15.48% | -10.80% | 4.55% | 0.41% | -4.82% | 17.16% |
| Industrials | 7.15% | 1.65% | -19.27% | -15.84% | 9.29% | -8.79% | 2.65% | 10.04% |
| Energy | 16.25% | 56.60% | -20.57% | -40.49% | 28.92% | -27.98% | 19.82% | 9.11% |
| Technology | 15.80% | 4.68% | -21.03% | -16.77% | 14.98% | 1.02% | 14.79% | 14.94% |
| Materials | 5.14% | -0.10% | -47.77% | -46.67% | 29.30% | -23.66% | -7.13% | 8.74% |
| Cons. Disc. | -62.85% | -52.93% | -57.81% | -56.63% | 79.10% | 16.83% | -46.74% | 1.22% |
| Financials | -75.79% | -127.36% | -370.48% | 78.14% | 31.04% | 540.12% | -88.18% | -35.68% |
| S&P | -16.64% | -17.79% | -8.05% | -14.52% | 20.22% | 8.44% | -12.43% | -2.03% |
| Sector | Q1 '09 E | Q4 '08 E | Q3 '08 A | Q2 '08 A | 2010 E | 2009 E | 2008 E | 2007 A |
| Cons. Stap. | -7.21% | 14.21% | 13.34% | 2.01% | 9.49% | 10.36% | 10.79% | 7.16% |
| Utilities | 2.18% | 2.83% | -6.70% | 7.13% | 10.86% | 5.52% | 3.82% | 11.39% |
| Health Care | 0.41% | 2.29% | 7.09% | 8.84% | 9.48% | 8.15% | 7.76% | 19.56% |
| Telecom | -10.80% | -15.48% | -15.68% | -3.69% | 4.55% | 0.41% | -4.82% | 17.16% |
| Industrials | -16.62% | -18.82% | 1.11% | 6.25% | 9.30% | -9.20% | 2.26% | 10.09% |
| Technology | -16.70% | -20.27% | 5.89% | 16.52% | 15.41% | 0.78% | 14.82% | 14.34% |
| Energy | -40.49% | -20.57% | 56.60% | 16.25% | 28.92% | -27.98% | 19.82% | 9.11% |
| Materials | -46.67% | -47.77% | -0.10% | 5.14% | 29.30% | -23.66% | -7.13% | 8.74% |
| Cons. Disc. | -53.08% | -54.19% | -43.68% | -58.72% | 69.43% | 13.39% | -42.32% | 1.09% |
| Financials | 46.78% | -239.60% | -118.61% | -71.72% | 31.77% | 440.62% | -86.53% | -34.41% |
| S&P | -15.64% | -10.62% | -17.62% | -16.40% | 20.22% | 8.31% | -12.99% | -2.18% |
Scorecard and Median EPS Growth Rates
- Median EPS growth of 21 firms reporting so far is -2.5%
- Surprise ratio of 1.38 and the median surprise of 1.8% are both far below normal
- Remaining firms expected to be down 5.3% in the fourth quarter
- Median EPS growth expected to be -9.0% in the first quarter
- Five sectors expected to be negative for the fourth quarter, 8 negative for the first quarter
- Only Health Care expected to be positive for both quarters
- Median EPS growth of 3.0% expected in 2009
- 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 and Gas (COG - Analyst Report) is just as significant to the results for the Energy sector as the growth rate for Exxon Mobil (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) | 2008 (A) | 2009 (E) | 2010 (E) | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match |
| Cons. Disc. | 1.24% | -11.77% | 9.67% | -0.25% | 6.07% | 7.50% | 5.70% | 6 | 0 | 0 |
| Cons. Stap. | -0.35% | -2.08% | 9.04% | 6.19% | 7.60% | 9.76% | 8.16% | 3 | 1 | 0 |
| Industrial | -4.36% | -33.14% | -5.25% | -17.41% | 8.22% | 3.45% | -7.28% | 0 | 1 | 1 |
| Tech | -15.54% | -23.08% | 18.31% | -24.95% | 5.81% | 8.00% | -1.25% | 2 | 3 | 1 |
| Financial | -147.50% | -60.37% | -37.71% | 51.26% | 57.12% | 3.70% | -235.70% | 0 | 3 | 0 |
| S&P 500 | -2.50% | -13.75% | 7.43% | -2.75% | 9.29% | 4.20% | 1.83% | 11 | 8 | 2 |
| Sector | 4Q '08 (E) | 1Q '09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Cons. Stap. | 7.41% | -5.60% | 11.11% | 6.36% | 9.47% |
| Healthcare | 5.58% | 3.26% | 17.60% | 9.15% | 12.95% |
| Telecom | 2.47% | -6.52% | -2.94% | -1.54% | 4.41% |
| Industrial | 1.14% | -25.00% | 16.92% | -0.59% | 10.13% |
| Energy | 0.00% | -10.42% | 12.83% | -14.85% | 21.40% |
| Cons. Disc. | -1.08% | -20.00% | 8.77% | -4.38% | 13.59% |
| Tech | -14.89% | -17.37% | 19.10% | 8.04% | 15.20% |
| Financial | -17.17% | -8.13% | 6.15% | -2.60% | 16.02% |
| Utilities | -24.36% | 10.00% | 9.28% | 5.55% | 10.01% |
| Materials | -29.64% | -39.74% | 9.70% | -2.63% | 14.94% |
| S&P 500 | -5.26% | -8.95% | 13.12% | 2.95% | 12.80% |
The Zacks Revisions Ratio: 2008
- Revisions ratio for full S&P 500 down to 0.12, from 0.15 two weeks ago
- Every sector but Telecom, Staples and Utilities has at least 4 cuts per increase
- Three sectors have at least 20 cuts for every increase
- 48 firms see mean estimate decline by more than 10% (fourth quarter implicitly cut huge)
- Ratio of firms with rising to falling mean estimates at 0.28, up from 0.27 2 weeks ago
- Total number of revisions (4 week total) steady at 1,808 same as 2 weeks ago
- Increases down to 242 from 242 (-19.4%); cuts up to 1,613 from 1,566 (3.0%)
- Near low of seasonal revisions activity, 2008 to go into record books over next few weeks
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 | 0.19% | 0.83 | 3 | 6 |
| Consumer Staple | -0.95% | 0.43 | 16 | 25 |
| Utilities | -1.03% | 0.43 | 15 | 15 |
| Consumer Disc | -5.30% | 0.22 | 18 | 55 |
| Health Care | -0.21% | 0.18 | 15 | 36 |
| Financial Services | -30.82% | 0.15 | 19 | 60 |
| Energy | -1.49% | 0.06 | 5 | 34 |
| Materials | -6.54% | 0.05 | 2 | 26 |
| Industrials | -2.70% | 0.04 | 4 | 51 |
| Technology | -11.46% | 0.04 | 8 | 61 |
| S&P 500 | -8.65% | 0.12 | 105 | 369 |
- Full S&P 500 2009 revisions ratio remains at 0.08
- More than 4 cuts per increase for 9 sectors, more than 10 per increase in 6 sectors
- Just 1 estimate raised in Materials sector versus 117 cuts
- Just 7 Technology increases versus 312 cuts
- Telecom the "best" at a 0.28 reading, but only 23 total revisions
- Ratio of rising to falling mean estimates steady at 0.17 same as 2 weeks ago
- Total number of revisions down to 1,953 from 1,967 last week (-0.7%)
- Increases up to 151 from 143 (+5.6%), cuts down to 1,802 from 1,824 (-1.2%)
- Near the seasonal low point of total revisions activity
- Size of cuts horrific: 22% of all S&P firms' 2009 estimates down more than 10% over last 4 weeks, 11.2% down more than 20%
- Only thing holding up 2009 expected growth is the decline of 2008 base Stocks with Positive revisions activity: None worth mentioning
- Stocks with Negative Revisions activity (almost all but highlight): DD, DVN, TXN
Stocks with Positive Revisions
There are none worth mentioning.
Stocks with Negative Revisions (think of these as representative of their areas):
DuPont (DD - Analyst Report) had 11 estimate cuts and no increases, slashing its mean estimate by 24.5%.
Devon Energy (DVN - Analyst Report) had no increases and 10 cuts, its mean estimate fell 23.3%.
Texas Instruments (TXN - Analyst Report) saw 23 cuts versus no increases resulting in a 57.7% decline in its mean estimate.
| Avg. 4wk EPSChange (FY09) | Avg. 4wk EPS Change (FY09) | Revisions Ratio | Firms With FY09 EPS Increase | Firms With FY09 EPS Decrease |
| Telecom | -0.70% | 0.28 | 3 | 6 |
| Consumer Staples | -1.58% | 0.22 | 10 | 30 |
| Health Care | -2.30% | 0.15 | 15 | 37 |
| Consumer Discr | -6.42% | 0.12 | 8 | 68 |
| Utilities | -3.26% | 0.10 | 8 | 24 |
| Financial Services | -8.60% | 0.10 | 11 | 70 |
| Energy | -11.61% | 0.08 | 0 | 39 |
| Industrials | -7.36% | 0.05 | 4 | 52 |
| Technology | -12.67% | 0.02 | 7 | 66 |
| Materials | -14.19% | 0.01 | 3 | 25 |
| S&P 500 | -7.47% | 0.08 | 69 | 417 |
Market Cap versus Total Earnings
- S&P 500 P/E for 2008 12.6x and 11.6x for 2009
- Forward Earnings Yield of 8.64% wildly attractive relative to 10 year T-Note of 2.42%
- Real P/Es are higher (and earnings yields lower) since the “E” is still way to high
- Financials expected to get 3.2% of total S&P earnings in 2008, down from 19.3% in 2007, rebound to 15.4% expected for 2009, currently represent 13.0% of total market cap
- Energy’s share expected to grow to 23.6% of total in 2008 from 16.5% in 2007, expected to recede to 15.4% in 2009. Sector represents just 12.9% 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
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/Es are calculated as the total Market Capitalization of the sector divided by the total expected earnings for the sector.
Note that we follow the convention of calling the last full fiscal year to be reported 2007, and the next full fiscal year to be reported 2008. Thus odd fiscal year companies can change the "historic" totals for 2007 and that these numbers are likely to be very noisy over the next few weeks until we switch over to 2008, 2009, and 2010 after the 4Q earnings season.
| Sector | 2007% | 2008% | 2009% | Market Cap% | P/E 08 | P/E 09 |
| Technology | 12.11% | 15.48% | 15.00% | 15.79% | 12.87 | 12.19 |
| Health Care | 12.47% | 15.55% | 15.30% | 14.38% | 11.67 | 10.88 |
| Cons Staple | 9.61% | 12.88% | 12.39% | 14.09% | 13.8 | 13.17 |
| Financials | 19.30% | 3.20% | 15.37% | 12.99% | 51.16 | 9.78 |
| Energy | 16.54% | 22.63% | 14.98% | 12.87% | 7.17 | 9.95 |
| Industrials | 11.48% | 13.21% | 11.20% | 10.74% | 10.26 | 11.1 |
| Cons Disc. | 7.55% | 4.81% | 5.13% | 8.48% | 22.24 | 19.13 |
| Utilities | 3.63% | 4.31% | 4.17% | 4.04% | 11.83 | 11.21 |
| Telecom | 3.81% | 4.15% | 3.83% | 3.70% | 11.24 | 11.18 |
| Materials | 3.52% | 3.79% | 2.62% | 2.91% | 9.67 | 12.87 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 12.61 | 11.58 |
Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Thursday 1/1/2009
Read the full analyst report on DVN
Read the full analyst report on DD
Read the full analyst report on MS
Read the full analyst report on COG
Read the full analyst report on XOM
Read the full analyst report on GS
Read the full analyst report on TXN
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