Earnings Trends Highlights: Caterpillar, Freeport McMoran, Ingersoll Rand, Parker Hannifin and Texas Instruments

Earnings Trends Highlights: Caterpillar, Freeport McMoran, Ingersoll Rand, Parker Hannifin and Texas Instruments

For Immediate Release

Chicago, IL - April 28, 2009 - Zacks Research Director, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.

Key Points from Van Dijk's Latest Earnings Assessment

• Total earnings so far down 9.4% from last year, but up sharply from Q4
• Financials much better than expected, but quality of earnings is awful
• Excluding Financials, total earnings are down 22.2% from a year ago and -12.2% from Q4
• Total net income is down in all sectors but Financials and Health Care
• Health Care, Tech and Discretionary all showing lots of positive surprises
• Full S&P 500 (SPX) total net income expected to be 25.1% lower than last year
• Revisions Ratios improve but remain deep in negative territory
• Bottom-up estimate for S&P 500 now $59.36 in 2009 versus $59.42 last week.
• S&P 500 now expected to earn $74.21 in 2010 versus $74.01 last week

Total Net Income Growth Earnings are coming in much better than expected.

This is particularly true in the financial sector. However, there the quality of earnings is exceptionally poor, with billions of dollars of earnings due to declines in the prices of their bonds. This is pure accounting nonsense. Mark-to-market is apparently ok for liabilities, but not for assets? Never mind that most bonds have covenants that require that if the issuer buys back the bond they can only do so after a certain date and at a prearranged price, which is almost always above par.

If Financials are excluded, the picture is vey different, with total net income down 22.2% from a year ago, and 12.2% lower than in the 4th quarter. The 139 (27.8%) firms that have reported, collectively earned $57.5 billion versus $63.5 billion a year ago and $28.2 billion in the fourth quarter. The 112 non-financial firms have collectively earned $41.8 billion versus $53.7 billion a year ago and $47.5 billion in the fourth quarter.

Health Care is the only other sector showing year-over-year growth in total net income, and that is just 3.1%. The weakest performances so far in terms of total net income growth have been Materials, Industrials and Consumer Discretionary.

However, with less than one-third of the S&P 500 firms reporting so far, so the results could still change significantly. Also the percentage of firms reporting is far from uniform across sectors (still no utilities reports for example).

Still, many of the earnings declines have been less than expected, and the raw number of positive surprises is leading disappointments by slightly more than 2:1. The median surprise is very healthy at 5%. Despite the better than expected earning reports, estimate cuts continue to run almost 2x the number of positive estimate revisions for 2009 and over 2:1 for 2010.

Since the first quarter is part of the full year earnings any firm that surprises positively and does not see its full year estimates raised has an implied estimate cut for the remaining quarters of the year. That being said, the current revisions ratio of 0.51 is substantially higher than it was a month ago (0.29). The 2010 revisions ratio has also improved substantially, to 0.46 from 0.27 a month ago. In other words, estimates are being cut, but at a slower pace than then were previously.

Scorecard and Median EPS Growth Rates

• Median EPS decline reported so far is 23.5%
• A 15.0% decline is seen in the first quarter for those companies yet to report
• Every sector but Health Care is down among the reported firms
• Same is true for those yet to report (Utilities at 0.0%)
• Surprise ratio at 2.08, median surprise 5.00% with 139 firms reporting
• Positive surprises concentrated in the Discretionary, Health Care and Tech Sectors

Just over 1 in 4 firms have reported their first quarter results. Of the 33 results in, positive surprises lead disappointments, but by less than the normal margin. The ratio of positive surprises to disappointments stands at 2.08:1, while in recent years it has regularly been well over 3:1. The median surprise is 5.00%, which is above historical norms. These figures will be very volatile in the early going and will most likely change significantly by the time earnings season is over.

Tech has the best overall surprise profile so far, with 18 positive surprises and just 2 disappointments. The median surprise is a very healthy 10.4%.

Health Care and Consumer Discretionary also have shown surprisingly good results. By raw count, financials have had just as many disappointments as positive surprises, but the positive surprises have come at the bigger and more significant firms (and are of extremely poor quality). Energy has also been disappointing, but it still very early for the sector with just over 10% of the results in.

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 up to 0.51, from 0.41 last week
• Revisions ratio has been trending higher, but still very weak
• Tech in positive territory mostly due to Semiconductor strength
• Industrials hardest hit with cuts outnumbering increases by almost 9:1
• Ratio of firms with rising to falling mean estimates rises to 0.40 from 0.36
• Total number of revisions (4-week total) up to 2,386 from 2,259 last week (5.6%)
• Increases up to 805 from 720 (11.8%), cuts up to 1,581 from 1,538 (2.8%)

The revisions ratio improved sharply, but remains in very negative territory. (Generally we consider anything below 0.80 to be negative, and anything above 1.25 to be positive.)

Only Telecom and Discretionary are in neutral territory. The overall pace of estimate revisions is slowing dramatically, as it usually does after earnings season is over. The revisions ratio is based on the four week moving totals of estimate changes. Thus the rise in the ratio may have more to do with old estimate cuts falling off faster than old estimate increases than it does with new estimate revisions.

Technology leads the pack this week. Within the sector, Texas Instruments (TXN) was impressive with 12 increases and no cuts, which resulted in a 20.5% increase in its mean estimate. TXN alone was responsible for 1 out of 5 estimate increases in the sector.

The weakness in the Industrial sector was wide spread, some of the more significant cuts in the sector were in Caterpillar (CAT), Ingersoll Rand (IR) and Parker Hannifin (PH).

The Materials sector was very weak overall, most of that was due to weakness in the Steel and Paper companies. However, one stock that was moving against the grain of the sector was Freeport McMoran (FCX) where the mean estimate is up more than 90% over the last month.

The Zacks Revisions Ratio: 2010

• Overall picture for 2010 similar to that of 2009
• Revisions ratio up to 0.46 from 0.42
• Discretionary, Staples, Tech the "strongest"; Industrials the weakest for 2010
• Over 9 cuts per increase in the Industrials sector; Transports and Machinery are very weak
• The ratio of rising to falling mean estimates rises to 0.47 from 0.40
• Total number of revisions rises to 1,757 from 1,622 (8.3%)
• Estimate increases rises to 577 from 480 (20.2%), cuts rise to 1,200 from 1,142 (5.1%)
• Industrials, Energy and Materials slammed

The 2010 revisions ratio story is pretty much the same as 2009: a low but improving revisions ratio. As with 2009, the total number of revisions rose, which is seasonally normal, but cuts actually fell while increases rose strongly.

The 2 Consumer Sectors and Tech have made it into neutral territory, but all others remain very weak. The Industrials sector was far and away the weakest, with Financials, Energy and Materials also very weak.

In recent weeks the price of oil has started to rebound. If that holds, it seems likely that the estimates could start to head up again for the energy sector. As it stands now, the size of the cuts in the sector is very large. The Material sector tells a similar story.

Earnings Shares and P/E’s

• Health Care expected to take Earnings crown from Energy in 2009, keep it in 2010
• Energy Earnings Share expected to plunge to 12.0% from 23.2%
• Financials 2009 earnings share expected to rise to 11.7% from -2.0% in 2008.
• Consumer Discretionary market cap share far above earnings shares (overvalued?)
• Health Care Market Cap share well below earnings shares (undervalued?)
• P/E’s are too low since earnings estimates are too high
• Earnings Shares, including historical, based on current make up of S&P 500
• 12-month forward S&P P/E of 13.46 equates to earnings yield of 7.46%. This is very attractive relative to 10-year T-note yield of 2.93%, but only mediocre relative to 5.66% A-rated 10-year corporate.
• T-note rates are rising and more realistic earnings yields of near 5.87% based on lower earnings ($50) means the spread, while still attractive, is not overwhelming.

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Contact: Dirk Van Dijk, CFA
Company: Zacks.com
Phone: 312-265-9211
Email: pr@zacks.com
Visit: www.Zacks.com

Read the full analyst report on CAT

Read the full analyst report on FCX

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