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Handicapping the Q3 Earnings Season

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The 16 S&P 500 members that have reported quarterly results over the last two weeks for their fiscal August-ending quarter form part of our Q3 earnings season tally. We have another 20 companies on deck to report results this week, including 7 S&P 500 members. These early reporters include such industry leaders as Nike (NKE), FedEx (FDX), Oracle (ORCL) and others. As such, the Q3 earnings season has gotten underway already, but the market will start paying attention to the reporting cycle the week of October 9th when the big banks start coming out with quarterly results.

The chart below shows the weekly reporting calendar for the S&P 500 index, with the earnings season really ramping up in about two weeks.

This week’s notable earnings reports include:

Lennar (LEN) – Lennar shares are expected to report results before the market’s open on Tuesday, October 3rd, with the homebuilder expected to earn $1.01 per share on $3.22 billion in revenues. Earnings per share for the quarter will be unchanged from the year-earlier period though revenues would be up +13.6% from the same period last year.

This Miami, Florida-based homebuilder has been literally in the eye of the storm lately, and the impact showed up in its mid-September pre-announcement. As a result, estimates have come down recently, though most of the negative revisions pertain to the coming quarter (hurricane impact) while estimates for 2018 have been trending up.

Lennar shares have been strong performers this year, with the stock up +21.6% in the year-to-date period vs. the +13.5% gain for the Zacks Construction sector and the +12.1% gain for the S&P 500 index. We should keep in mind, however, that all of the stock’s gain this year had taken place through early March, with the stock essentially flat since then.

Pepsi (PEP) – Pepsi reports quarterly results before the market’s open on Wednesday, October 4th, with the company expected to earn $1.42 per share on $16.4 billion in revenues, representing year-over-year gains of +1.5% and +2.4%, respectively.

The stock has been struggling since mid-August and is currently up +6.5% for the year, underperforming Coke’s (KO - Free Report) +8.5% gain and the S&P 500’s +12.1% gain. Weakness in the company’s international business, particularly the Asia, Middle East & North Africa (AMENA) segment has been a drag in recent quarters, offsetting continued momentum in the Frito Lay North America business.

The carbonated beverage business has been struggling over the last couple of years, an issue that Pepsi shares with Coke, but the stock’s near-term momentum will reflect results from the international business and management’s commentary about the outlook.

Costco (COST) – Costco reports results after the market’s close on Thursday, October 5th, with the retail giant expected to post $2.01 in EPS on $41.7 billion in revenues, up +13.8% and +14.2% from the year-earlier level, respectively. The revisions trend has been positive, with the current consensus EPS estimate for the quarter modestly up since the start of the period.

The stock has been on an uncharacteristic rollercoaster ride this year and down big since mid-June following the Amazon – Whole Foods deal. The stock is currently up +3% this year, underperforming the broader market (up +12.1%) as well Wal-Mart (WMT – up +13.5%).

Other notable companies this week include Constellation Brands (STZ) and Yum China (YUMC).

Expectations for Q3

Total Q3 earnings are expected to be up +3.2% from the same period last year on +5% higher revenues. This would follow +11.1% earnings growth in 2017 Q2 on +5.5%, the second quarter in a row of double-digit earnings growth.

Estimates for Q3 came down as the quarter unfolded, with the current +3.2% growth down from +6.3% at the end of June. The chart below shows how Q3 earnings growth expectations have evolved since the start of the quarter.

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 +1.4% from +3.2%. 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 +9.7% on +6.7% 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 20 companies including 7 S&P 500 and reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
CAL-MAINE FOODSCALM-0.27-0.64-43.75%MondayBTO
PAYCHEX INCPAYX0.60.61.89%TuesdayBTO
LENNAR CORP -ALEN1.011.0116.67%TuesdayBTO
AZZ INCAZZ0.410.55-16.39%TuesdayBTO
NOVAGOLD RSRCSNG-0.03-0.020.00%TuesdayAMC
PEPSICO INCPEP1.421.47.91%WednesdayBTO
MONSANTO CO-NEWMON-0.380.0710.92%WednesdayBTO
ACUITY BRANDSAYI2.32.095.73%WednesdayBTO
RPM INTL INCRPM0.840.83-12.82%WednesdayBTO
8POINT3 ENERGYCAFD0.650.38-25.00%WednesdayAMC
RESOURCES CNCTNRECN0.120.15-9.09%WednesdayAMC
CONSTELLATN BRDSTZ2.161.7718.18%ThursdayBTO
INTL SPEEDWAYISCA0.050.03-6.25%ThursdayBTO
COSTCO WHOLE CPCOST2.011.776.87%ThursdayAMC
HELEN OF TROYHELE1.31.2213.27%ThursdayAMC
TRILOGY METALSTMQ-0.02-0.040.00%ThursdayAMC

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