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Q3 Earnings Season Gets Underway

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Oracle (ORCL) gave us a shaky start to the Q3 earnings season, with the tech company offering a tepid outlook for the current period even as it matched bottom-line expectations and beat revenue estimates for its fiscal quarter ending on August 31st. The stock had weakened in the days ahead of the earnings release, with the anemic outlook adding to its woes as market participants try to size up the sustainable growth potential of its cloud business.  

The predominant majority of companies use calendar quarters as their fiscal reporting periods, but not all of them as the aforementioned Oracle report shows. In addition to companies on calendar quarters (fiscal periods ending on September 30th), companies fiscal periods ending in August and October will also form part of our Q3 earnings tally. The fact is that we will have seen such Q3 results from almost two dozen S&P 500 members by the time the banks start reporting results on October 12th.

We have 5 S&P 500 members with fiscal quarters ending in August on deck to report results this week. This week’s notable reports include:

FedEx (FDX) – FedEx reports results after the market’s close on Tuesday, September 19th, with the shipping giant expected to earn $3.17 per share on $15.37 billion in revenues, representing year-over-year growth rates of +9.3% and +4.8%, respectively. Estimates have been coming down lately, with the current $3.17 estimate down from $3.19 two months back. FedEx shares move in response to earnings releases, with the stock moving higher following the last two quarterly reports. The stock has been weak since mid-July, but is still up +14.8% this year, outperforming UPS (UPS) as well as the S&P 500 index.

Adobe Systems (ADBE) – Adobe also reports after the market’s close on Tuesday, September 19th, with the software company expected to earn $1.00 per share on $1.81 billion in revenues, representing year-over-year growth rates of +34% and +23.9%, respectively. The stock has been an impressive performer this year, up +50.2% year-to-date, outperforming the Zacks Tech sector’s +18.5% gain and the S&P 500 index’s +11.6% gain. The stock was up following each of the last two quarters as it beat top- and bottom-line estimates.

General Mills (GIS - Free Report) – General Mills reports quarterly results before the market’s open on Wednesday, September 20th, with the cereal maker expected to earn $0.77 per share on $3.79 billion in revenues, representing year-over-year declines of -1.7% and -3%, respectively. General Mills shares have lagged the peer group as well as the broader market this year, with the stock down -10.1% in the year-to-date period.

The chart below shows the weekly calendar of earnings releases for the entire Q3 earnings cycle. As you can see, we are about four weeks away from the reporting cycle really ramping up.

Expectations for Q3

Total Q3 earnings are expected to be up +3.3% from the same period last year on +5% higher revenues. This would follow +11.1% earnings growth in 2017 Q2 with revenues improving by +5.5%, the second quarter in a row of double-digit earnings growth.

Estimates for Q3 have come down as the quarter unfolded, with the current +3.3% growth down from +6.3% at the end of June. The chart below shows how Q3 earnings growth expectations have evolved over the last 10 weeks.

Please note that while Q3 estimates have followed the well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions nevertheless compares favorably to other periods. In other words, Q3 estimates have come down, but they haven’t come down by as much.

The table below shows the summary picture for Q3, contrasted with what was actually achieved in Q2.

In terms of sector focus, the strongest growth in Q3 is coming from the Energy sector which benefits from easy comparisons. Excluding the Energy sector, the aggregate growth pace drops to +1.5% from +3.3%. The Construction and Conglomerates sectors are the only other sectors with double-digit growth rates. Earnings growth is also strong for the Technology sector, with total earnings for the sector expected to be up +8.8% on +6.5% higher revenues.

On the negative side, Q3 earnings are expected to be below the year-earlier level for 7 of the 16 Zacks sectors, with double-digit declines for the Transportation, Aerospace, Basic Materials and Autos sectors.

The chart below shows Q3 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace has started decelerating from the double-digit level of the first two quarters of the year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

Here is a list of the 22 companies including 5 S&P 500 reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
STEELCASE INCSCS0.230.32-21.05%MondayAMC
AUTOZONE INCAZO15.1414.3-4.67%TuesdayBTO
NEOGEN CORPNEOG0.30.260.00%TuesdayBTO
YINGLI GREEN ENYGE-2.050.935.24%TuesdayBTO
APOGEE ENTRPRSAPOG0.920.77-12.68%TuesdayBTO
FEDEX CORPFDX3.172.99.25%TuesdayAMC
BED BATH&BEYONDBBBY0.951.11-12.12%TuesdayAMC
COPART INCCPRT0.310.292.78%TuesdayAMC
AAR CORPAIR0.310.292.33%TuesdayAMC
GENL MILLSGIS0.770.782.82%WednesdayBTO
ENSYNC INCESNC-0.08-0.120.00%WednesdayAMC
HERMAN MILLERMLHR0.570.616.36%WednesdayAMC
STUDENT TRANSPTSTB0.060.0714.29%ThursdayBTO
MANCHESTER UTDMANU0.110.070.00%ThursdayBTO
CARMAX GP (CC)KMX0.940.8815.31%FridayBTO

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