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Tuesday, January 21, 2014

Earnings remain front and center as the markets open after the MLK holiday. The overall tone of the reports this morning from the likes of Verizon (VZ - Analyst Report), Travelers (TRV - Analyst Report) and Halliburton (HAL - Analyst Report) is positive, though Johnson & Johnson’s (JNJ - Analyst Report) guidance is a bit on the soft side. IBM (IBM - Analyst Report) is on deck to report results after the close amid reports that the company is in talks with China’s Lenovo to sell its server business.

Including this morning’s reports, we now have Q4 results from 60 S&P 500 members that combined account for account for 17.8% of the index’s total market capitalization. Total earnings for these companies are up +34.4%, with 61% coming ahead of consensus earnings expectations. Total revenues are up +3.6% and 50.8% are beating top-line expectations.

Despite the lowered Q4 estimates, fewer companies are coming out with positive surprises. This may change in the coming days as the reporting cycle ramps up further, but it is nevertheless notable at this stage.

The earnings beat ratio of 61% for the companies that have reported thus far compares to the Q3 and four-quarter average of 67.8% for the same group of companies. The revenue beat ratio is similarly tracking lower.  

Finance is the only sector where we have a representative sample of results, with Q4 results from almost half of the sector’s total market capitalization already out. Total earnings for the sector are up +17% from the same period last year on -0.8% lower revenues, with strong year-over-year gains at Bank of America (BAC - Analyst Report) driving most of the gain.

The sector’s growth rates and beat ratios don’t compare favorably to what we have seen from this same group of companies in recent quarters. The picture may improve a bit in the coming days as the insurance industry, the second largest in the Finance sector after the banks, starts releasing results. Effective cost controls, reserve releases and favorable trends in the mortgage business helped banks offset tepid loan growth and net interest margin pressures in recent quarters to produce earnings growth. But the effect of these forces is diminishing already and need to be replaced by improvement in core earnings power.

As we start seeing results from companies beyond the Finance sector, management guidance will take the spotlight. Guidance has been overwhelmingly negative in recent quarters, but the improvement in the U.S. economic outlook and stabilization in Europe have raised hopes of a turnaround on that front. We will get some sense of that later today with the IBM report, though the earlier reports from Intel (INTC - Analyst Report), Oracle (ORCL - Analyst Report) and others don’t look very inspiring.

Sheraz Mian
Director of Research

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