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Ahead of Wall Street

Tuesday, July 23, 2013

Earnings will be front and center on an otherwise low-news day today. Even though the overall tone of this morning’s releases from DuPont (
(DD - Analyst Report)) and Travelers ((TRV - Analyst Report)) is on the positive side, top-line weakness is emerging as an enduring trend this earnings season as well. The aggregate Q2 growth rates and beat ratios look respectable enough at this stage, but a lot of that is due to strength in the Finance sector. Look a little deeper and the picture isn’t that reassuring.
 
Apple will be reporting after the close today, but including this morning’s reports from DuPont, United Technology (
(UTX - Analyst Report)), Travelers and others, we now have Q2 results from 130 S&P 500 companies or 26% of the index’s total membership that combined account for 37% of its total market capitalization.  Total earnings for these 130 companies are up +6.7%, with 61.5% beating earnings expectations. On the revenue side, we have a growth rate of +3.8%, with 42.3% coming ahead of top-line expectations. The earnings and revenue growth rates and the revenue beat ratio seen thus far are broadly in-line with what we saw from the same group of 130 companies in Q1, while the earnings beat ratio is tracking a bit lower.

Strong results from the Finance sector are playing a big role in keeping the aggregate Q2 data for the S&P 500 thus far in the “not-so-bad” category. Total earnings for the Finance sector are up +34.5% on +10.3% higher revenues, with beat ratios of 78.6% for earnings and 67.9% for revenues. It is very hard to be satisfied with the aggregate numbers once Finance is excluded.  Strip out Finance from the reports that have come out already and total earnings growth turn negative – down -3%. This is weaker than what these same companies reported in Q1. There are few positive surprises outside of Finance as well, with the earnings and revenue beat ratios outside of Finance tracking below Q1’s levels.

The composite Q2 growth rate, where we combine the results for the 130 that have come out with the 370 still to come, is for +1.4% total earnings growth on +0.3% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of -4.1%. Bottom line, the earnings picture outside of Finance is very weak in Q2, but expectations for the second half of the year reflect a meaningful recovery.

Current consensus estimates for Q3 reflect total earnings growth rate of +4.1% and +10.9% in Q4, followed by +11.2% growth in 2014 as a whole. Hard to envision these growth rates holding up given the overall negative tone of company guidance thus far. The question is whether investors will continue to shrug the resulting negative estimate revisions or will finally start paying attention to the underwhelming earnings growth picture?

Sheraz Mian
Director of Research

 

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