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Ahead of Wall Street

Friday, April 19, 2013

The Q1 earnings results have certainly not been great or even good, but they aren’t that terrible either, as the all around hand-wringing in the market would have us believe.
 
Including this morning’s reports from General Electric (
(GE - Analyst Report)), McDonald’s ((MCD - Analyst Report)), Honeywell ((HON - Analyst Report)) and others, we now have a representative enough sample to make the determination that Q1 results are not that different from what we have been seeing in the last few quarters. There are no doubt pockets of weakness – most companies are missing revenue expectations and positive surprises in the Tech sector are on the light side. But the overall level of growth (or lack thereof), surprises, and guidance is not materially weaker than what we saw from these companies in 2012 Q4 and the quarter before.
 
As such, the earnings question swirling around in the market at present is not so much about the Q1 earnings season, but rather what these results tell us about what is expected in the coming periods, particularly the second half of the year and next year.

Consensus expectations for the first half of 2013 aren’t looking for much earnings growth (up only +1.2% year over year), but estimates for the back half of the year represent a significant ramp up (up +10.8%) in growth which then continues into 2014 (up +11.7%). Recent economic data from home and abroad is likely prompting a reassessment of these earnings growth expectations. The earnings miss at IBM (IBM) after the close on Thursday and General Electric’s (GE - Analyst Report) comment this morning about further weakness in Europe brings home this issue.
 
The Earnings scorecard as of this morning shows Q1 reports from 102 S&P 500 companies that account for 32.8% of the index’s total market capitalization. For the Finance and Technology sectors, the two largest in the index, we now have Q1 results from 51.3% and 46% of the sectors’ market capitalization. Total earnings for these 102 companies are up +4.6% from the same period last year, with 69.6% beating earnings expectations. Revenues are up +3.5%, with only 36.3% of the companies coming ahead of top-line expectations.

The growth rates and earnings ‘beat ratio’ is comparable to what these same 102 companies reported in 2012 Q4, though the revenue ‘beat ratio’ is materially weaker (36.3% vs. 61.8%). The composite growth rate for Q1, where we combine the results of the 102 companies that are out with the 398 still to come, is for a drop of -0.8% in total earnings on flat revenues.

Having seen results from 46% of the Tech sector’s total market cap, the earnings and revenue growth rates are better than Q4, but the ‘beat’ ratios are weaker. Only 64.3% of the Tech companies have beaten Q1 earnings expectations thus far, weaker than the earnings ‘beat ratio’ for the S&P 500 as a whole of 69.6% and the 78.6% ‘beat ratio’ for the same group of companies in 2012 Q4. The revenue side is even weaker, as Wednesday’s ‘misses’ from Google (
) and Microsoft (MSFT) further confirmed, with only 35.7% of Tech companies coming ahead of top-line expectations.
 
Q1 earnings aren’t that bad, particularly relative to expectations. But the market may finally be realizing that its outlook for the coming periods needs to readjusted in light of the weakening economic backdrop. And it is this process to reassessment that is hanging over stocks at present.

Sheraz Mian
Director of Research

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