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Massive Cuts Continue
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Key Points:
- Early reports (26 total) are ugly with total net income off 79.7%
- All areas affected; 2009 and 2010 cuts both running more than 8:1 over increases
- Total net income in 2009, now expected to be below 2008
- P/Es based on 2009 estimates will prove to be to low as "E" plunges
- Financials expect high growth in fourth-quarter and 2009 due to easy comps
- Keep your eye on trends, not levels when it comes to Estimate Data
- Earnings Expectations are collapsing for both Q4 and 2009
- Revisions ratios switch to 2009 and 2010 from 2008 and 2009
Total Net Income Growth
- Total net income expected to fall 16.3% in fourth quarter from a year ago
- Negative year-over-year growth in Q4 now expected for 6 sectors
- Financials expect high growth due to easy comps
- Full-year net income in 2009 expected to be down 4.7% from 2007 levels
- Full-year total net income expected to be 0.2% lower in 2009 than in 2008. I suspect the actual decline will be much larger.
- Energy, Materials and Discretionary all expected to be down over 40% in Q4
- The current projections look extremely optimistic to me
- Early returns were very ugly. The 26 that have reported (November fiscal period ends) are down 79.7% in aggregate from a year ago (mostly Goldman Sachs Group, Inc. (GS - Analyst Report) and Morgan Stanely (MS - Analyst Report)). 87.3% lower than 3Q
- First peak at 2010 expectations looks for 19.0% growth over 2009
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 A | Q1 '09 E | 2007 A | 2008 A | 2009 E | 2010 E | |
| Materials | -22.23% | -19.55% | 113.28% | -50.00% | 12.04% | -11.22% | -25.34% | 9.79% | |
| Industrial | 9.65% | 4.12% | 0.53% | -10.82% | 12.42% | 5.46% | 5.12% | 8.20% | |
| Cons. Stap. | -2.16% | 20.04% | -1.50% | -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% | |
| Cons. Disc. | -32.12% | -45.92% | -9.71% | -67.56% | -18.48% | -70.11% | 49.01% | 43.99% | |
| Financials | -11.57% | -14.28% | -2614.42% | -37.65% | -5.28% | -25.53% | 5.14% | 20.31% | |
| S&P | -8.30% | -13.23% | -79.66% | -30.63% | -3.20% | -20.91% | 5.21% | 18.89% | |
| Sector | Q4 '08 | Q4 '07 | Q3 '08 | Q3 '07 | |||
| Technology | $1,710 | $1,866 | $1,793 | $1,417 | |||
| Cons. Stap. | $1,623 | $1,648 | $1,528 | $1,484 | |||
| Cons. Disc. | $1,133 | $1,255 | $2,459 | $2,090 | |||
| Industrial | $565 | $562 | $463 | $575 | |||
| Materials | $546 | $256 | ($20) | ($101) | |||
| Financial | ($4,477) | ($178) | $2,450 | $4,530 | |||
| S&P | $1,100 | $5,409 | $8,673 | $9,996 | |||
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 E | Q1 '09 E | 2007 A | 2008 E | 2009 E | 2010 E |
| Financials | -56.59% | -99.80% | 197.88% | 52.16% | -19.19% | -63.98% | 82.96% | 30.93% |
| Utilities | 7.10% | -6.61% | 26.52% | -9.98% | 11.26% | 3.65% | 5.15% | 11.15% |
| Health Care | 8.84% | 7.09% | 7.85% | 2.44% | 19.76% | 7.56% | 7.04% | 9.08% |
| Cons. Stap. | 1.26% | 14.19% | 3.34% | 7.38% | 6.74% | 11.39% | 9.19% | 6.68% |
| Telecom | -3.69% | -15.68% | -14.96% | -6.53% | 17.16% | -4.87% | -0.25% | 4.27% |
| Industrial | 7.15% | 1.65% | -29.72% | -2.68% | 10.03% | 2.61% | -9.07% | 7.05% |
| Technology | 15.85% | 4.69% | -31.55% | -13.01% | 14.94% | 14.69% | -6.38% | 15.11% |
| Energy | 16.25% | 56.60% | -41.16% | -34.82% | 9.11% | 19.71% | -28.88% | 28.65% |
| Materials | 3.39% | -0.96% | -42.39% | -40.69% | 8.74% | -11.11% | -30.86% | 34.19% |
| Cons. Disc. | -63.32% | -53.59% | -53.66% | -42.69% | 1.05% | -47.35% | 13.08% | 71.79% |
| S&P | -11.11% | -12.55% | -14.25% | -9.18% | 3.53% | -8.87% | -0.43% | 19.04% |
| Sector | Q2 '08 A | Q3 '08 A | Q4 '08 E | Q1 '09 E | 2007 A | 2008 E | 2009 E | 2010 E |
| Financials | -54.09% | -94.06% | 137.31% | 29.77% | -19.13% | -64.51% | 80.40% | 31.53% |
| Utilities | 7.10% | -6.61% | 26.52% | -9.98% | 11.26% | 3.65% | 5.15% | 11.15% |
| Health Care | 8.84% | 7.09% | 7.85% | 2.44% | 19.76% | 7.56% | 7.04% | 9.08% |
| Cons. Stap. | 2.01% | 13.34% | 2.93% | 5.82% | 7.16% | 10.85% | 8.87% | 6.73% |
| Telecom | -3.69% | -15.68% | -14.96% | -6.53% | 17.16% | -4.87% | -0.25% | 4.27% |
| Industrial | 6.25% | 1.11% | -29.02% | -3.76% | 10.09% | 2.22% | -9.48% | 7.10% |
| Technology | 16.57% | 5.90% | -30.16% | -13.18% | 14.43% | 14.73% | -6.10% | 15.50% |
| Materials | 6.18% | 0.25% | -35.61% | -32.83% | 10.15% | -7.26% | -26.60% | 32.20% |
| Energy | 16.25% | 56.60% | -41.16% | -34.82% | 9.11% | 19.71% | -28.88% | 28.65% |
| Cons. Disc. | -58.72% | -43.68% | -49.92% | -40.29% | 1.07% | -42.26% | 9.34% | 62.06% |
| S&P | -10.96% | -12.59% | -16.29% | -10.38% | 3.20% | -9.43% | -0.21% | 19.03% |
Scorecard and Median EPS Growth Rates
- Median EPS growth of 26 firms reporting so far is -2.4%
- Surprise ratio is 1.88 and the median surprise is 1.8%; both are far below normal
- Remaining firms expected to be down 5.0% in Q4
- Six sectors expected to be negative for Q4, 7 negative for Q1
- Only Health Care, Staples and Utilities are expected to be positive for both quarters
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) | 2008 (A) | 2009 (E) | 2010 (E) | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match |
| Materials | 113.04% | 25.14% | 82.00% | 21.70% | 6.07% | 3.45% | 63.33% | 1 | 0 | 0 |
| Cons. Disc. | 1.24% | -11.77% | 4.99% | -3.56% | 7.60% | 10.00% | 4.45% | 7 | 0 | 1 |
| Cons. Stap. | -0.53% | -2.80% | 9.04% | 5.94% | 8.22% | 15.00% | 3.27% | 5 | 1 | 0 |
| Industrial | -4.36% | -33.14% | -5.25% | -17.46% | 5.81% | 3.39% | -7.28% | 0 | 1 | 1 |
| Tech | -15.54% | -23.08% | 18.31% | -24.95% | 57.12% | 8.00% | -1.25% | 2 | 3 | 1 |
| Financial | -147.50% | -64.00% | -37.71% | 51.26% | 9.29% | 3.70% | -235.71% | 0 | 3 | 0 |
| S&P 500 | -2.39% | -10.77% | 5.15% | -2.47% | 9.29% | 5.20% | 1.76% | 15 | 8 | 3 |
| Sector | 4Q '08 (E) | 1Q '09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Healthcare | 7.71% | 8.55% | 12.33% | 17.60% | 12.03% |
| Utilities | 3.76% | 6.63% | 3.92% | 9.18% | 9.95% |
| Cons. Stap. | 3.35% | 4.08% | 9.28% | 11.11% | 9.20% |
| Telecom | 0.00% | -4.35% | 30.38% | -2.94% | 4.36% |
| Energy | -3.13% | -18.84% | 22.61% | 12.83% | 13.10% |
| Industrial | -7.69% | -5.88% | 19.38% | 16.92% | 7.69% |
| Cons. Disc. | -11.36% | -12.98% | 14.45% | 8.89% | 9.75% |
| Financial | -12.50% | -6.25% | 11.52% | 8.04% | 15.13% |
| Tech | -12.90% | -6.33% | 11.30% | 19.13% | 11.61% |
| Materials | -36.61% | -30.73% | 23.08% | 9.70% | 16.76% |
| S&P 500 | -5.88% | 0.00% | 13.33% | 13.27% | 11.26% |
The Zacks Revisions Ratio: 2009
- Revisions ratio for full S&P 500 up to 0.12, from 0.08 last week
- All sectors have at least 3 cuts for every increase
- 5 sectors have at least 10 cuts for every increase
- 21% of all firms see mean estimate decline by more than 10%; 10.8% more than 20%
- Ratio of firms with rising to falling mean estimates is at 0.17 and is unchanged from last week
- Total number of revisions (4-week total) down to 1,909 from 1,953 (-2.3%)
- Increases up to 199 from 151 (+31.8%), cuts down to 1,710 from 1,802 (-5.1%)
- Near low of seasonal revisions activity
Stocks with Positive Revisions:
Best Buy (BBY - Analyst Report) had 10 upward revisions and 2 cuts, resulting in a 3.4% increase in its consensus earnings estimate.
Darden Restaurants, Inc. (DRI - Analyst Report) had 11 upward revisions and 2 cuts. These revisions caused a a 3.1% increase in the consensus earnings estimate.
General Mills (GIS - Analyst Report) had 9 upward revisions and 2 cuts. The consensus earnings estimate is 0.8% higher.
Stocks with Negative Revision: (Most are highlighted as representative of their areas)
General Electric Company (GE - Analyst Report) had 11 cuts and 0 increases resulting in a 12.5% drop in its consensus earnings estimate
National Semiconductor Corporation (NSM) had 14 cuts and no increases. The consensus earnings estimate plunged by 48.2% drop.
Regions Financial Corporation (RF - Analyst Report) suffered 11 cuts and no increases. This caused a 65.9% decrease in the consensus earnings estimate
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 (FY09) | Avg. 4wk EPS Change (FY09) | Revisions Ratio | Firms With FY09 EPS Increase | Firms With FY09 EPS Decrease |
| Consumer Staple | -1.17% | 0.29 | 14 | 27 |
| Consumer Disc | -4.59% | 0.26 | 14 | 64 |
| Telecom | -2.00% | 0.17 | 2 | 7 |
| Health Care | -0.95% | 0.16 | 12 | 39 |
| Energy | -9.12% | 0.12 | 3 | 36 |
| Financial Services | -9.33% | 0.10 | 13 | 65 |
| Utilities | -3.46% | 0.10 | 4 | 30 |
| Technology | -10.27% | 0.06 | 10 | 63 |
| Industrials | -6.06% | 0.05 | 2 | 53 |
| Materials | -13.86% | 0.03 | 4 | 25 |
| S&P 500 | -6.43% | 0.12 | 78 | 409 |
The Zacks Revisions Ratio: 2010
- Sample size of 2010 revisions is thin, but starting off weak
- Mean estimates to be affected by new estimates as much as revisions
- More than 3 cuts per increase for 9 sectors, more than 5 per increase in 6 sectors
- Just 1 estimate raised in Materials sector versus 34 cuts
- Just 1 Industrial increase versus 106 cuts
- Telecom the "best" at a 0.28 reading, but only 9 total revisions
- Ratio of rising to falling mean estimates steady at 0.24
- Total number of revisions 733: 86 up, 647 down
- Size of cuts horrific: 22.6% of all S&P firms 2010 estimates down more
than 10% over last 4 weeks, 9.0% down more than 20%
Avg. 4wk EPSChange (FY10) Avg. 4wk EPS
Change (FY10)Revisions
RatioFirms With FY10
EPS IncreaseFirms With FY10
EPS DecreaseTelecom -3.85% 0.80 5 2 Utilities -2.61% 0.33 6 9 Consumer Discr -5.06% 0.25 13 52 Consumer Staples -1.71% 0.21 7 23 Health Care -0.99% 0.19 8 30 Energy -8.40% 0.18 2 32 Financial Services -9.18% 0.09 13 62 Technology -8.37% 0.09 16 51 Materials -10.59% 0.03 3 15 Industrials -9.63% 0.01 7 46 S&P 500 -6.37% 0.13 80 322 Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Thursday, Jan 8, 2009
Read the full analyst report on NSM
Read the full analyst report on GE
Read the full analyst report on GIS
Read the full analyst report on MS
Read the full analyst report on RF
Read the full analyst report on COG
Read the full analyst report on XOM
Read the full analyst report on DRI
Read the full analyst report on GS
Read the full analyst report on BBY
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