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Revisions Trend Fails to Impress

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Note: The following is an excerpt from this week’sEarnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

•    Results from the traditional retailers have been fairly strong, notwithstanding a few notable disappointments.

•    With results from 93% of the Retail sector’s market cap in the S&P 500 out, earnings and revenue growth is on track to be notably above other historical periods, though positive revenue surprises are not as numerous as had been the trend in other recent periods.

•    For the 474 S&P 500 members that have reported Q1 results already, total earnings are up +24.2% from the same period last year on +8.5% higher revenues, with 77.6% beating EPS estimates and 74.5% beating revenue estimates. The earnings season has ended for 11 of the 16 Zacks sectors.
•    Except for the proportion of these 474 index members beating EPS and revenue estimates, which are tracking roughly in-line with the preceding quarter’s level, growth in Q1 is notably tracking above historical periods.

•    Looking at Q1 as a whole, total earnings are expected to be up +24% from the same period last year on +8.5% higher revenues, the highest quarterly earnings growth pace in 7 years. Net Income margins for the quarter are on track to expand by 1.5 percentage points, with the strongest gains at the Finance, Technology and Energy sectors.
•    Q1 Earnings growth is in double-digit territory from the year-earlier level for 13 of the 16 Zacks sectors, including the Technology and Finance sectors. The Auto sector has the weakest growth of all 16 sectors, with +0.3% earnings growth on +1.4% higher revenues.

•    Energy sector earnings increased +75.7% from the same period last year on +14.2% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from +24.2% to +22.5%.

•    For the small-cap S&P 600 index, we now have Q1 results from 89.7% of the index’s total membership. Total earnings for these companies are up +20.9% on +9.6% higher revenues, with 59% beating EPS estimates and 72% beating revenue estimates. In addition to earnings and revenue growth, revenue surprises are notably tracking above historical periods for the small caps.

•    For the quarter as whole, total S&P 600 earnings are expected to be up +18.2% on +9.2% higher revenues. We have more details about small-cap data on page 28 of the full report.

•    For full-year 2018, total earnings for the S&P 500 index are expected to be up +19.5% on +5.9% higher revenues. For full-year 2019, earnings are expected to be up +9.5% on +4.5% higher revenues.

•    The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.4X and index close, as of May 22nd, is $156.19. Using the same methodology, the index ‘EPS’ works out to $170.98 for 2019 (P/E of 15.9X) and $187.74 for 2020 (P/E of 14.5X). The multiples for 2018 and 2019 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.   

Retail Sector Scorecard

With results from Target (TGT - Free Report) , Kohl’s (KSS - Free Report) , Wal-Mart (WMT - Free Report) , and other traditional retailers out now, we have Q1 results from the equivalent of 93% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Retail sector companies that have reported results are up +21.6% from the same period last year on +9.5% higher revenues, with 72.4% beating EPS estimates and 65.5% beating revenue estimates.

The comparison charts below put the sector’s Q1 results in a historical context.

Please note that the Zacks Retail sector includes the online vendors and restaurant players in addition to ‘traditional’ brick-and-mortar players.

The comparison charts above show that while growth (both earnings as well as revenues) is tracking notably above historical periods, the proportion of positive EPS surprises is in-line with historical periods and revenue surprises are tracking below the 4-quarter average (but above the 12-quarter average).

With respect to growth, Amazon’s (AMZN - Free Report) blockbuster numbers, particularly on the revenues front, has a big role in the very strong growth picture at this stage. Amazon’s Q1 earnings increased +125% on +42.9% higher revenues, with the net dollar increase in the online retailer’s revenues an impressive $15.3 billion.

The comparison charts below try to look at the sector’s growth picture with and without the Amazon contribution.

The right-hand chart that compares the sector’s Q1 earnings and revenue growth on an ex-Amazon basis shows that growth still compares favorably with other periods even without the online giant’s considerable contribution.

Weak Revisions Trend

While growth in Q1 has been very strong, analysts have been hesitant to raise their estimates for Q2. The fact is that aggregate expectations for the quarter have barely budged since the quarter got underway, as the chart below shows.

This revisions trend is in contrast to the very positive revisions trend we saw ahead of the start of the Q1 earnings season. A big part of the positive revisions we saw at the start of the year was directly tied to the impact of tax cuts. But the estimated trend had been moving favorably since the second half of 2017 and we expected some of that to show up in estimates for Q2. This didn’t happen, as the above chart shows.

There is not much change to estimates for the second half of the year either, as the chart below shows.

Expectations Beyond Q1

The chart below contrasts the Q1 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming three periods.

As you can see, the growth picture remains very strong, even though it is expected to decelerate in the coming quarters from Q1’s lofty level. The worrying part isn’t the seeming deceleration, but the underwhelming revisions trend for Q2 and beyond. This lack of positive revisions coupled with ongoing strength in the U.S. dollar and questions about the global economy likely provide sufficient grounds for the market’s less-than-enthusiastic reaction to Q1 results.

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.

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