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It's Still About Earnings

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Key Points:
  • 4Q earnings season almost done -- 496 (99.2%) of S&P 500 reports in. Median surprise of 3.64% and surprise ratio of 3.07 for EPS, 1.05% and 1.85 for revenues.
  • Reported (496 firms) fourth quarter earnings growth of 30.7%, 19.9% excluding Financials. On Revenue side, 8.24% growth reported, 8.77% excluding Financials.
  • Reported net margins (496 firms) rise to 8.98% from 7.29% a year ago, down from 9.06% in third quarter. Margins excluding Financials rise to 8.33% from 7.38% last year and 8.23% in third quarter.
  • Full-year total earnings for the S&P 500 jumps 45.2% in 2010, expected to rise 14.8% further in 2011. Growth to continue in 2012 with total net income expected to rise 13.6%. Financials major earnings driver. Excluding Financials, growth was 27.4% in 2010, and expected to be 14.0% in 2011 and 12.3% in 2012.
  • Total revenues for the S&P 500 rise 8.16% in 2010, expected to be up 2.82% in 2011, and 5.91% in 2012. Excluding Financials, revenues up 9.67% in 2010, expected to rise 6.62% in 2011 and 6.03% in 2012.
  • Net Margins marching higher, from 5.88% in 2008 to 6.39% in 2009 to 8.58% for 2010. 9.57% expected for 2011 and 10.26% in 2012. 
  • Net margins a major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.09% in 2009, 8.23% for 2010, 8.80% expected in 2011, and 9.23% in 2012.
  • Revisions ratio for full S&P 500 at 1.59 for 2011, at 1.66 for 2012, both bullish readings. Ratio of firms with rising to falling mean estimates at 1.50 for 2011, 1.87 for 2012, also very positive readings. Total revisions activity passed peak, change in revisions ratios will be driven by old estimates dropping out more than by new revisions.
  • S&P 500 earned $545.1 billion in 2009, rising to $791.5 billion in 2010, expected to climb to $907.5 billion in 2011. In 2012 the 500 are collectively expected to earn $1.0308 Trillion.
  • S&P 500 earned $57.48 in 2009: $83.47 in 2010 and $95.70 in 2011 expected, bottom up. For 2012, $108.68 expected. Puts P/Es at 15.26x for 2010, and 13.31x for 2011 and 11.72x for 2012 -- very attractive relative to 10-year T-note rate of 3.28%.
  • Top-down estimates: $92.68 for 2011 and $98.93 for 2012.
  • With earnings season effectively over, we omit the tables for those yet to report.

Strong Earnings to Overcome International Problems

The fourth quarter earnings season is effectively over, and before we know it the first quarter season will be upon us. We now have 496 or 99.2% of the S&P 500 reports in. However, the early reporting firms tend to be a bit bigger and more profitable than the stragglers, and those 496 firms actually represent 99.9% of the total expected net income.

The earnings season has been a strong one, with total net income for those firms rising 30.7% over a year ago. The median surprise of 3.64% is also fairly strong, although the ratio of positive to negative surprises is only somewhat above normal at 3.07. The total net income growth of the reporting firms is an acceleration from the 25.0% year-over-year growth those same firms posted in the third quarter.

The median surprise understates just how surprisingly good the earnings season was. Before it started, total net income growth was expected to be less than 20%. Financial firms setting aside much less than a year ago for bad debts was a big part of the earnings story for the quarter. If the Financial sector is excluded, total net income rose 19.9% from a year ago, which is not all bad either.

Earnings Growth to Slow

Earnings growth is expected to slow significantly in the first quarter to just 8.7%, in large part due to a tougher comparison a year ago. Given the trend of positive earnings surprises, I would be shocked if the actual growth rate is that low. It is almost certain to be in the double digits again.

Revenue growth was healthy at 8.24%, up from the 8.13% growth those 496 firms reported in the third quarter. Looking ahead to the first quarter, though, those firms are expected to post year-over-year revenue growth of just 1.84%. If the Financials are excluded, reported revenue growth is 8.77%, up from 8.34% in the third quarter, and slowing to 2.16% in the first quarter. Tougher year-over-year comparisons are a big part of the story.

Net Margin Expansion Continues

Thus, the stellar earnings growth is mostly due to the continued expansion of net margins.  Much of the year over year margin expansion is due to the Financials, where the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different.

Much of the earnings growth in the Financials has come from firms setting aside less for bad debts than they did last year. One should be a bit on the doubtful side about the quality of those earnings, particularly in the absence of mark-to-market accounting. Net margins for the quarter were 8.98%, or 8.33% if one excludes the Financials, up from 7.29% (7.38% excluding Financials) a year ago, but down from 9.06% (up from 8.23% excluding Financials) in the third quarter.

On an annual basis, net margins continue to march northward on a yearly basis. In 2008, overall net margins were just 5.88%, rising to 6.39% in 2009. They hit 8.58% in 2010 and are expected to continue climbing to 9.57% in 2011 and 10.26% in 2012. The pattern is a bit different, particularly during the recession, if the Financials are excluded, as margins fell from 7.78% in 2008 to 7.09% in 2009, but have started a robust recovery and rose to 8.23% in 2010. They are expected to rise to 8.80% in 2011 and 9.23% in 2012.

Yearly Earnings Continue to Rise

The expectations for the full year are very healthy, with total net income for 2010 rising to $791.5 billion in 2010, up from $545.1 billion in 2009. In 2011, the total net income for the S&P 500 should be $907.5 billion, or increases of 44.7% and 13.8%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.0308 Trillion.

That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $108.68. That is up from $57.48 for 2009, $83.47 for 2010, and $95.70 for 2011. In an environment where the 10-year T-note is yielding 3.28%, a P/E of 15.3 based on 2010 and 13.3x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.7x.

With more than three 2011 estimates being raised for every two being cut (revisions ratio of 1.59), one has to feel confident that the current expectations for 2011 will be hit, and more likely exceeded. Analysts are raising their 2012 projections at an even higher rate, with a revisions ratio of 1.66. While a lot can happen between now and the time the 2012 earnings are all in, upward estimate momentum means that the current 2012 earnings are more likely to be exceeded than for them to fall short.

This provides a strong fundamental backing for the market to continue to move higher. The we are in the third year of the presidential cycle (almost always the best of the four, and by a big margin). We have a Democrat in the White House, which has historically meant good things for the stock market, with an average annualized return over the last 50 years more than triple that when the GOP holds the Oval Office. Few, if any, binomial variables have as much statistical significance.

Storms on the Horizon
 

That does not mean that all is smooth sailing ahead. We managed to avoid a government shutdown, but the reprieve only lasts until the end of this week. A government shutdown would not be good for either the market or the economy.

On the other hand, the big spending cuts being demanded by the House would also be bad for the economy. The economy does seem to have made a slow turn towards recovery, the it is still tenuous. Even if we avoid a government shutdown, the House spending cuts of $61 billion, would exert a very significant drag on the economy, as will the cuts that are happening on the State and Local levels.

Mark Zandi of Moody’s Economics, and a top economic advisor to the John McCain presidential campaign, has estimated that the spending cuts could result in as many as 700,000 fewer jobs being created in 2011 and 2012, combined. The impact will probably be about 1% slower GDP growth than if the cuts had not happened. The lower growth will result in lower tax collections, so the impact on the budget deficit will be much less than the $60 billion advertised.

Job creation remains sluggish, but is starting to show signs of picking up. We created 222,000 jobs in the private sector in February, up from just 68,000 in January.  However, State and Local governments laid off a total of 30,000 people for the month. Those jobs count just like private sector jobs, and are a major headwind to bringing down the total number of unemployed.

The household survey has been much more upbeat, showing growth of 250,000 jobs in February. The unemployment rate fell to 8.9%, and it was as high as 9.8% as recently as November. The drop in December and January was the largest two-month drop in the unemployment rate since 1958, and many thought it was a fluke, but the continued fall in February is an indication that it was for real.

International Turmoil

The international situation clearly has the potential to abort the recovery as well. The disaster in Japan will clearly slow its economy dramatically in the first quarter, although much of that growth will be made up later in the year as the reconstruction process gets under way. Statistically that will make the Japanese economy look better, but it does not mean that they will be better off -- just the statistical quirks of the "broken window" fallacy.

Many U.S.-made products have parts which are made in Japan, and that is likely to disrupt production here. The turmoil in the Middle East is not going away, and that is likely to keep oil prices both high and volatile. High oil prices will act as a depressing force on the economy as they will increase the trade deficit.

However, so far we have not seen these effects hit analysts earnings estimates, at least in aggregate. Looking a little closer, though, the weak revisions ratios for the Utilities and Transportation sectors are at least in part due to high oil prices.

Still, the combination of very reasonable valuations and an economy that still seems on the mend despite the headwinds from abroad means that the S&P 500 will probably end the year higher than where it is today. Cyclical sectors such as Industrials, Materials and Energy will probably lead the way.
 
Scorecard & Earnings Surprise
  • Almost done, 496 firms (99.2%) have reported. A somewhat better than “normal” earnings season. Median surprise of 3.64%, and a 3.07 surprise ratio (339 beats, 109 misses), 68.8% of all firms beat expectations.
  • Fourteen sectors are finished, only Retail has more than one firm left to report.
  • Positive year-over-year growth for 370, falling EPS for 125 firms, 2.96 ratio, 74.6% of all firms reporting have higher EPS than last year.
  • Total net income up 30.7%, up 19.9% excluding Financials.
  • Conglomerates, Energy and Aerospace lead in surprises. Utilities only sector in negative territory.
 
Scorecard & Earnings Surprise 4Q Reported
Income Surprises Yr/Yr
Growth
%
Reported
Surprise
Median
EPS
Surp
Pos
EPS
Surp
Neg
#
Grow
Pos
#
Grow
Neg
Conglomerates 33.57% 100.00% 9.45 9 0 7 3
Oils and Energy 40.47% 100.00% 9.38 28 12 26 14
Aerospace -2.87% 100.00% 5.43 8 2 9 1
Consumer Discretionary 21.91% 100.00% 5.18 25 7 27 5
Computer and Tech 26.07% 100.00% 4.94 52 9 59 12
Finance 165.47% 100.00% 4.57 53 22 59 19
Retail/Wholesale 11.56% 93.18% 4.55 30 9 34 7
Auto -4.40% 100.00% 4.49 4 2 4 2
Basic Materials 47.68% 100.00% 3.88 19 3 20 3
Medical 7.90% 100.00% 3.61 37 5 38 9
Business Service 16.52% 94.74% 3.53 16 1 16 2
Consumer Staples 7.08% 100.00% 2.60 23 5 22 14
Industrial Products 64.79% 100.00% 1.20 13 6 19 2
Construction 24.83% 100.00% 0.00 5 4 3 8
Transportation 30.69% 100.00% 0.00 4 2 8 1
Utilities 1.02% 100.00% -1.56 15 22 19 23
S&P 500 30.70% 99.20% 3.64 341 111 370 125


Sales Surprises
  • Sales Surprise ratio at 1.85, median surprise 1.05%, a strong showing, 64.3% of all firms do better than expected on top line.
  • Growing Revenues outnumber falling revenues by ratio of 3.38, 77.0% of firms have higher revenues than a year ago.
  • Construction and Autos lead in sales surprise. Conglomerates, Industrials, Discretionary and Finance also posting better than expected top lines. Aerospace and Utilities disappoint.
  • Revenue growth healthy at 8.24%, but still greatly lags earnings growth pointing to net margin expansion (see net margin tables below). Refer to the “% reported” column to assess the significance of individual sector information, and how much it is likely to change from here.

Sales Surprises
Sales Surprises Yr/Yr
Growth
%
Reported
Surprise
Median
Sales
Surp
Pos
Sales
Surp
Neg
#
Grow
Pos
#
Grow
Neg
Construction -3.88% 100.00% 5.401 6 5 4 7
Auto 1.37% 100.00% 4.5 6 0 5 1
Conglomerates 4.39% 100.00% 2.202 8 1 9 1
Finance 7.76% 100.00% 2.064 57 17 49 29
Industrial Products 23.98% 100.00% 1.968 16 5 18 3
Consumer Discretionary 6.50% 100.00% 1.603 25 7 26 6
Basic Materials 18.16% 100.00% 1.53 16 7 23 0
Oils and Energy 17.12% 100.00% 1.445 23 17 31 8
Computer and Tech 15.65% 100.00% 1.364 47 25 62 10
Business Service 7.82% 94.74% 1.163 13 5 18 0
Medical 3.44% 100.00% 0.941 30 17 35 12
Retail/Wholesale 4.21% 93.18% 0.37 25 16 37 4
Consumer Staples 6.46% 100.00% 0.253 22 14 22 14
Transportation 12.71% 100.00% 0.103 5 4 9 0
Aerospace 0.19% 100.00% -0.67 5 5 8 2
Utilities 1.00% 100.00% -2.309 15 27 26 16
S&P 500 8.24% 99.20% 1.048 319 172 382 113


Reported Quarterly Growth: Total Net Income
  • The total net income is 30.7% above what was reported in the fourth quarter of 2009, up from 25.0% growth these same 496 firms reported in the third quarter. These firms expected to slow to 6.8% year-over-year growth in the first quarter. Growth excluding Financials 19.9%, down from 24.4% in the third quarter.
  • Sequential earnings growth is 4.32%. Sequential decline of 5.37% expected for first quarter.
  • Massive growth for Financials mostly due to lower loss provisions, earnings quality questionable.  Industrials, Materials and Energy all reporting over 40% growth.
  • Autos and Aerospace post lower total net income than last year -- three sectors with positive but only single-digit growth.
  • While 99.2% of the companies have reported, they represent 99.94% of all the expected net income, provided that the unreported all report in line with expectations. Projected final year-over-year growth of 30.7%.

Quarterly Growth: Total Net Income Reported
Income Growth "Sequential Q1/Q4 E" "Sequential Q4/Q3 A" Year over Year 4Q 10 A Year over Year 1Q 11 E Year over Year 3Q 10 A
Finance 9.84% -6.96% 165.47% -2.94% 28.30%
Industrial Products 0.48% -3.13% 64.79% 44.42% 50.58%
Basic Materials 27.98% 14.01% 47.68% 28.69% 42.34%
Oils and Energy 2.22% 16.22% 40.47% 21.17% 33.93%
Conglomerates -29.78% 26.73% 33.57% 16.58% 6.20%
Transportation -18.50% -2.63% 30.69% 21.51% 65.17%
Computer and Tech -19.48% 17.82% 26.07% 13.53% 45.68%
Construction -33.22% -17.16% 24.83% -17.21% 1148.57%
Consumer Discretionary -16.64% 1.39% 21.91% 6.36% 16.71%
Business Service -6.78% 12.51% 16.52% 14.27% 15.62%
Retail/Wholesale -20.38% 33.44% 11.56% 3.27% 9.69%
Medical 1.83% -3.30% 7.90% -1.46% 11.04%
Consumer Staples -12.57% -4.49% 7.08% -0.40% 5.34%
Utilities 21.43% -29.47% 1.02% -2.83% 6.24%
Aerospace -19.57% 9.18% -2.87% 1.36% 144.50%
Auto 21.09% -22.78% -4.40% 2.21% 90.75%
S&P 500 -5.37% 4.32% 30.70% 6.75% 25.00%
S&P ex Financials -7.48% 6.61% 19.88% 9.78% 24.35%


Quarterly Growth: Total Revenues Reported
  • Revenue growth strong at 8.24%, up from the 8.13% growth the same firms posted in the third quarter. Excluding Financials revenue growth is 8.77%, up from 8.34% in 3Q.
  • Sequentially revenues 6.58% higher than in the third quarter, 6.57% higher ex-Financials.
  • Five sectors reporting double-digit revenue gains, Construction, Retail and Finance reporting revenue declines.
  • Industrials, Materials, Energy and Tech posting revenue growth of over 15%.
  • Looking to first quarter, total revenue among these 496 firms expected to rise 1.84% year over year, and be down 7.45% sequentially.
  • Revenue growth accelerates for nine sectors, slows from third quarter pace for seven sectors.

Quarterly Growth: Total Revenues Reported
Sales Growth "Sequential Q1/Q4 E" "Sequential Q4/Q3 A" Year over Year 4Q 10 A Year over Year
1Q 11 E
Year over Year 3Q 09 A
Industrial Products 0.52% 0.82% 23.98% 18.83% 22.92%
Basic Materials 1.59% 6.61% 18.16% 12.51% 17.45%
Oils and Energy 0.83% 8.03% 17.12% 15.73% 15.95%
Computer and Tech -7.36% 10.79% 15.65% 13.31% 20.08%
Transportation -0.99% 2.96% 12.71% 11.96% 16.71%
Business Service -4.62% 7.16% 7.82% 7.24% 7.68%
Finance -26.45% 6.55% 7.76% -24.45% 1.82%
Consumer Discretionary -6.31% 7.64% 6.50% 7.78% 3.08%
Consumer Staples -16.32% 7.42% 6.46% -4.12% 3.69%
Conglomerates -14.57% 11.62% 4.39% -1.58% -0.11%
Retail/Wholesale -6.57% 10.62% 4.21% 3.80% 3.75%
Medical -0.56% 3.86% 3.44% 3.80% 8.45%
Auto -6.63% 8.20% 1.37% 3.61% 5.02%
Utilities 3.42% -5.79% 1.00% -2.20% 5.46%
Aerospace -8.51% 4.31% 0.19% 1.50% 2.36%
Construction -3.18% -4.75% -3.88% 5.01% 3.06%
S&P -7.45% 6.58% 8.24% 1.84% 8.13%
Excluding Financial -7.44% 6.57% 8.77% 2.16% 8.34%


Quarterly Net Margins Reported
  • Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector. 
  • Net margins for S&P 500 expand to 8.98% from 7.29% a year ago, but down from 9.06% in the third quarter. Net margins ex-Financials rise to 8.33% from 7.38% a year ago and up from 8.23% in the third quarter.
  • Utilities and Aerospace only sectors to post lower margins than last year, huge margin expansion among the Financials as they slash bad debt provisions.
  • Looking to the first quarter, net margins expected to rise to 9.10% from 8.56% in the first quarter of 2010. Ex-Financials margins expected to rise to 8.08% from 7.61%.
  • Margin expansion the key driver behind earnings growth.

Quarterly: Net Margins Reported
Net Margins Q1 2011 Estimated Q4 2010 Reported 3Q 2010 Reported 2Q 2010 Reported 1Q 2010 Reported 4Q 2009 Reported
Computer and Tech 15.26% 17.50% 16.51% 15.80% 15.23% 16.11%
Business Service 13.22% 13.53% 12.89% 12.74% 12.41% 12.52%
Conglomerates 8.74% 10.61% 9.35% 8.64% 7.36% 8.29%
Consumer Staples 11.06% 10.57% 11.88% 10.85% 10.65% 10.52%
Consumer Discretionary 8.29% 10.05% 10.77% 9.49% 8.30% 8.75%
Finance 14.27% 9.93% 11.38% 12.09% 11.11% 3.23%
Medical 9.65% 9.41% 10.13% 10.17% 10.17% 9.03%
Transportation 6.64% 8.03% 8.49% 8.17% 6.09% 6.93%
Oils and Energy 7.93% 7.70% 7.16% 8.05% 7.46% 6.42%
Industrial Products 7.51% 7.41% 7.83% 7.85% 6.11% 5.66%
Utilities 8.03% 6.81% 9.08% 8.27% 8.03% 6.82%
Aerospace 5.95% 6.74% 6.44% 6.79% 5.94% 6.96%
Basic Materials 8.45% 6.71% 6.27% 7.15% 7.39% 5.37%
Retail/Wholesale 3.80% 4.84% 3.69% 3.91% 3.82% 4.16%
Auto 5.02% 3.89% 5.45% 6.26% 5.12% 4.13%
Construction 1.44% 2.04% 2.34% 3.66% 1.78% 1.57%
S&P 500 9.10% 8.98% 9.06% 9.10% 8.56% 7.29%
Excluding Financial 8.08% 8.33% 8.23% 8.07% 7.61% 7.38%


Annual Total Net Income Growth
  • Following a rise of just 2.19% in 2009, total earnings for the S&P 500 jumps 45.2% in 2010, 14.7% expected further in 2011. Growth ex-Financials 27.4% in 2010, 14.0% in 2011.
  • Early read of 2012 growth looking for 13.6% growth. 12.3% ex-Financials.
  • Auto net income expands more than 20x in 2010, Financial net income more than quadruples.
  • All sectors expected to show total net income rise in 2011 and in 2012. Utilities only (small) decliner in 2010. Ten sectors expected to post double-digit growth in 2011 and 13 in 2012. No sector expected to grow less than 5% in 2012.
  • Cyclical sectors expected to lead in earnings growth again in 2011 and into 2012.


Annual Total Net Income Growth
Net Income Growth 2009 2010 2011 2012
Basic Materials -50.13% 71.63% 34.13% 13.41%
Industrial Products -37.39% 40.99% 27.08% 20.38%
Consumer Discretionary -15.67% 15.07% 26.27% 15.77%
Oils and Energy -55.04% 49.98% 21.96% 14.29%
Construction - to - - to + 21.76% 48.93%
Transportation -30.17% 44.19% 20.17% 17.81%
Finance - to + 328.18% 17.99% 19.55%
Computer and Tech -5.02% 47.78% 17.62% 12.42%
Business Service 1.14% 16.13% 14.27% 14.49%
Retail/Wholesale 2.44% 15.66% 11.72% 12.93%
Consumer Staples 5.79% 11.71% 8.31% 9.92%
Conglomerates -23.81% 11.26% 7.98% 17.83%
Auto - to + 2210.92% 7.85% 17.65%
Medical 2.29% 9.78% 4.48% 6.62%
Utilities -12.54% -0.90% 4.33% 5.64%
Aerospace -15.05% 18.15% 2.50% 16.80%
S&P 2.19% 45.22% 14.65% 13.59%


Annual Total Revenue Growth
  • Total S&P 500 Revenue in 2010 expected to be 8.16% above 2009 levels, a rebound from a 6.57% 2009 decline.
  • Total revenues for the S&P 500 expected to rise 2.82% in 2011, 5.91% in 2012.
  • Energy to lead revenue race in 2010 and 2011. Industrials, Materials, Tech and Transports also expected to continue to show double-digit revenue growth in 2011.
  • All sectors but Staples and Finance expected to show positive top line growth in 2011, but four sectors expected to show positive growth below 5%.
  • Financials and Aerospace the only sectors to post lower top line for 2010. Revenues for Financials are notoriously flakey, low interest rates depress interest income (but also interest expense).
  • Construction the only sector expected to post double-digit top line growth in 2012. No sector expected to post falling revenues. Industrials, Energy, Autos and Tech all expected to see revenues grow by more than 8%.
  • Revenue growth significantly different if Financials are excluded, down 10.46% in 2009 but growth of 9.67% in 2010, 6.62% in 2011, and 6.03% in 2012.

Annual Total Revenue Growth
Sales Growth 2009 2010 2011 2012
Oils and Energy -34.41% 23.04% 14.42% 8.28%
Industrial Products -18.33% 13.46% 13.39% 9.76%
Basic Materials -19.30% 12.78% 12.25% 5.18%
Computer and Tech -4.50% 15.33% 10.53% 8.01%
Transportation -13.65% 10.83% 10.18% 7.87%
Consumer Discretionary -10.05% 3.84% 9.56% 5.59%
Auto -21.36% 8.77% 7.87% 8.63%
Business Service -2.35% 6.09% 6.41% 6.09%
Construction -15.92% 0.47% 6.23% 10.99%
Retail/Wholesale 1.45% 4.35% 5.94% 5.45%
Aerospace 6.30% -0.89% 4.09% 6.08%
Utilities -5.90% 2.31% 4.06% 3.13%
Medical 6.07% 8.78% 3.62% 3.20%
Conglomerates -13.27% 1.06% 0.08% 5.55%
Consumer Staples -2.03% 11.60% -8.92% 4.47%
Finance 21.18% -0.24% -20.44% 4.92%
S&P -6.57% 8.16% 2.82% 5.91%
Excluding Financial -10.46% 9.67% 6.62% 6.03%


Annual Net Margins
  • Net Margins marching higher, from 5.88% in 2008 to 6.39% in 2009 to 8.58% for 2010, 9.57% expected for 2011. Trend expected to continue into 2012 with net margins of 10.26% expected in the early going. Major source of earnings growth.
  • Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 7.09% in 2009, 8.23% for 2010, 8.80% expected in 2011. Expected to grow to 9.32% in 2012.
  • Financials net margins soar from -8.42% in 2008 to 18.09% expected for 2012, taking the margin crown from Tech.
  • All sectors but Utilities see higher net margins in 2010 than in 2009. All sectors but Aerospace expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with all sectors expected to post expansion in margins.
  • Seven sectors to boast double-digit net margins in 2012, up from just two in 2009.
  • Sector net margins are calculated as total net income for sector divided by total revenues. However, there are generally fewer revenue estimates than earnings estimates for individual companies.

Annual Net Margins
Net Margins 2009A 2010E 2011E 2012E
Computer and Tech 11.91% 15.26% 16.24% 16.90%
Finance 2.49% 10.71% 15.88% 18.09%
Business Service 11.04% 12.09% 12.98% 14.01%
Consumer Staples 9.92% 9.93% 11.80% 12.42%
Medical 9.71% 9.80% 9.89% 10.21%
Consumer Discretionary 7.67% 8.50% 9.79% 10.74%
Conglomerates 8.14% 8.96% 9.66% 10.79%
Transportation 5.84% 7.59% 8.28% 9.05%
Oils and Energy 6.27% 7.64% 8.14% 8.60%
Basic Materials 4.46% 6.79% 8.11% 8.75%
Industrial Products 5.80% 7.21% 8.08% 8.86%
Utilities 8.09% 7.84% 7.86% 8.05%
Aerospace 5.35% 6.38% 6.28% 6.92%
Auto 0.24% 5.20% 5.20% 5.63%
Retail/Wholesale 3.52% 3.90% 4.11% 4.41%
Construction -0.50% 2.69% 3.08% 4.13%
S&P 500 6.39% 8.58% 9.57% 10.26%
Excluding Financials 7.09% 8.23% 8.80% 9.32%


Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2011

  • Revisions ratio for full S&P 500 at 1.59, up from 1.51, a very bullish reading. However, change in revisions ratio now driven more by old estimates falling out than new ones coming in.
  • Five sectors with revisions ratios at or above 2.0.
  • Eleven sectors with positive revisions ratios, five below 1.0.
  • Ratio of firms with rising to falling mean estimates at 1.50, down from 1.55, still a bullish reading.
  • Total number of revisions (4 week total) passed seasonal peak at 2,240, down from 2,663 last week (-15.9%).
  • Increases at 1,376 down from 1,604 (-14.2%), cuts at 864, down from 1,059 (-18.4%).

The Zacks Revisions Ratio: 2011
Sector %Ch
Curr Fiscal Yr
Est - 4 wks
#
Firms
Up
#
Firms
Down
#
Ests
Up
#
Ests
Down
Revisions
Ratio
Firms
up/down
Conglomerates 0.08 5 2 12 2 6.00 2.50
Industrial Products 1.26 13 3 67 12 5.58 4.33
Consumer Discretionary 0.08 20 7 86 29 2.97 2.86
Auto -4.71 4 2 13 5 2.60 2.00
Business Service 0.26 8 7 28 14 2.00 1.14
Computer and Tech 0.05 31 20 186 94 1.98 1.55
Retail/Wholesale 0.20 22 21 266 145 1.83 1.05
Finance 1.81 47 25 184 101 1.82 1.88
Basic Materials 2.49 15 5 53 31 1.71 3.00
Oils and Energy 2.14 28 12 240 141 1.70 2.33
Medical 0.21 27 16 76 60 1.27 1.69
Consumer Staples -0.59 15 17 65 66 0.98 0.88
Utilities -1.65 15 21 78 95 0.82 0.71
Aerospace -0.07 3 3 2 5 0.40 1.00
Transportation -0.77 2 6 10 26 0.38 0.33
Construction -5.06 4 6 10 38 0.26 0.67
S&P 0.31 259 173 1376 864 1.59 1.50


Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2012

  • Revisions ratio for full S&P 500 at 1.66, up from 1.62 last week, in bullish territory.
  • Seven sectors have at least two increases per cut, four have more than three increases per cut. Autos perfect but small sample size. Industrials, Conglomerates and Discretionary also strong.
  • Four sectors with negative revisions ratios (below 1.0), 12 with ratios above 1.0. Utilities and Transportation weak.
  • Ratio of firms with rising estimates to falling mean estimates at 1.87, down from 1.88 -- in very bullish territory.
  • Total number of revisions (4-week total) at 1,716, up from 1,967 last week (-12.8%).
  • Increases at 1,071 down from 1,217 last week (-12.0%), cuts fall to 645 from 750 last week (-14.0%).

The Zacks Revisions Ratio: 2012
Sector %Ch
Next Fiscal Yr Est - 4 wks
#
Firms Up
#
Firms Down
#
Ests Up
#
Ests Down
Revisions
Ratio
Firms up/down
Auto 0.46 3 2 10 0 999.99 1.50
Industrial Products 1.49 13 2 69 10 6.90 6.50
Conglomerates 0.31 7 2 13 2 6.50 3.50
Consumer Discretionary 0.49 18 8 66 21 3.14 2.25
Oils and Energy 2.33 30 10 213 84 2.54 3.00
Retail/Wholesale 2.28 31 13 167 73 2.29 2.38
Basic Materials 1.98 20 2 40 18 2.22 10.00
Business Service 0.42 10 5 16 9 1.78 2.00
Aerospace 0.31 7 2 5 3 1.67 3.50
Finance 0.29 47 25 121 73 1.66 1.88
Medical 0.14 31 15 97 73 1.33 2.07
Computer and Tech -0.02 32 19 131 107 1.22 1.68
Construction -7.06 5 4 17 19 0.89 1.25
Consumer Staples -1.12 15 16 50 61 0.82 0.94
Transportation -0.55 3 6 10 16 0.63 0.50
Utilities -1.21 16 23 46 76 0.61 0.70
S&P 0.31 288 154 1071 645 1.66 1.87


Total Income and Share
  • S&P 500 earned $545.1 billion in 2009, rising to earn $791.5 billion in 2010, $907.5 billion expected in 2011.
  • Early expectations that the S&P 500 total earnings will hit the $1 Trillion mark in 2012 at $1.0308 Trillion.
  • Finance share of total earnings moves from 5.9% in 2009 to 17.5% in 2010. Rise to 18.0% expected for 2011, 19.0% in 2012, but still well below 2007 peak of over 30%. Energy share also rising going from 11.9% in 2009 to 13.2% in 2012.
  • Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.3% in 2012, down each year.
  • Market Cap shares of Construction, Staples, Retail, Transportation, Industrials and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
  • Earnings shares of Energy, Finance and Medical well above market cap shares.
  • As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also over weight sectors where earnings shares exceed market cap shares.

Total Income and Share
Income ($ Bill) Total
Net
Income
$ 2010
Total
Net
Income
$ 2011
Total
Net
Income
$ 2012
% Total
S&P Earn
2010
% Total
S&P Earn
2011
% Total
S&P
Earn
2012
% Total
S&P Mkt
Cap
Finance $138,552 $163,471 $195,426 17.50% 18.01% 18.96% 16.00%
Computer and Tech $135,189 $159,011 $178,758 17.08% 17.52% 17.34% 17.84%
Oils and Energy $97,225 $118,580 $135,528 12.28% 13.07% 13.15% 12.62%
Medical $104,100 $108,765 $115,970 13.15% 11.98% 11.25% 10.18%
Consumer Staples $63,228 $68,480 $75,271 7.99% 7.55% 7.30% 8.19%
Retail/Wholesale $57,678 $64,437 $72,767 7.29% 7.10% 7.06% 8.02%
Utilities $49,297 $51,430 $54,329 6.23% 5.67% 5.27% 5.89%
Consumer Discretionary $25,430 $32,111 $37,174 3.21% 3.54% 3.61% 4.21%
Conglomerates $29,091 $31,414 $37,015 3.68% 3.46% 3.59% 3.91%
Basic Materials $23,071 $30,946 $35,095 2.91% 3.41% 3.40% 3.33%
Industrial Products $15,864 $20,160 $24,267 2.00% 2.22% 2.35% 2.65%
Aerospace $15,104 $15,481 $18,082 1.91% 1.71% 1.75% 1.63%
Business Service $13,272 $15,166 $17,363 1.68% 1.67% 1.68% 1.97%
Transportation $11,686 $14,044 $16,546 1.48% 1.55% 1.61% 1.90%
Auto $10,805 $11,653 $13,710 1.37% 1.28% 1.33% 1.08%
Construction $1,942 $2,364 $3,521 0.25% 0.26% 0.34% 0.59%
S&P 500 $791,534 $907,512 $1,030,822 100.00% 100.00% 100.00% 100.00%


P/E Ratios
  • Trading at 15.26x 2010, 13.31x 2011 earnings, or earnings yields of 6.55% and 7.51%, respectively.  Early 2012 P/E at 11.72x or earnings yield of 8.53%.
  • Earnings Yields still attractive relative to 10-year T-Note rate of 3.28%.
  • Medical has lowest P/E based on 2010 earnings. Autos cheapest on 2011 and 2012 earnings.
  • Construction has highest P/E for all three years, but falling fast.
  • Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011, continue down in 2012.
  • S&P 500 earned $57.48 in 2009: $83.47 in 2010 and $95.70 in 2011 expected. Early expectation for $108.68 for 2012.

P/E Ratios
P/E 2009 2010 2011 2012
Auto 277.8 12.0 11.1 9.5
Medical 13.0 11.8 11.3 10.6
Finance 59.7 13.9 11.8 9.9
Oils and Energy 15.4 13.0 12.7 10.9
Aerospace 23.5 15.7 12.9 11.2
Basic Materials 30.0 17.5 13.0 11.5
Computer and Tech 23.6 15.9 13.6 12.1
Utilities 14.3 14.4 13.8 13.1
Consumer Staples 17.5 15.6 14.4 13.1
Industrial Products 18.1 16.2 15.0 12.8
Conglomerates 19.4 16.8 15.0 13.3
Retail/Wholesale 20.9 18.0 15.7 13.7
Business Service 23.0 20.0 15.8 13.7
Consumer Discretionary 28.4 20.2 15.9 13.2
Transportation 28.3 19.6 16.3 13.8
Construction NM 36.9 30.3 20.4
S&P 500 22.16 15.26 13.31 11.72


Biggest FY1 Revisions

The first table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. The second shows the largest declines. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.

Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.

Biggest FY1 Revisions(Largest Increases)
Company Ticker %Ch
Curr Fiscal Yr Est - 4 wks
%Ch
Next Fiscal Yr Est - 4 wks
# Up-Dn/Tot
%Ch
Curr Fiscal Yr Est - 4 wks
# Up-Dn/Tot
%Ch
Next Fiscal Yr Est - 4 wks
P/E using
Curr FY Est
P/E using
Next FY Est
Cabot Oil & Gas COG 122.76% 8.51% 0.45 0.18 55.28 33.86
Cliffs Natural CLF 23.96% 25.42% 0.73 0.44 6.90 6.42
Tesoro Corp TSO 21.54% 1.23% 0.41 0.36 12.12 10.94
Appld Matls Inc AMAT 20.42% 12.22% 1.00 0.44 9.85 9.56
Valero Energy VLO 16.09% 11.95% 0.53 0.53 9.76 8.37
Nvidia Corp NVDA 14.28% 12.85% 0.55 0.44 17.67 14.51
Wynn Resrts Ltd WYNN 13.88% 13.72% 0.70 0.57 40.20 30.24
Dell Inc DELL 13.32% 12.32% 0.94 0.33 9.03 8.58
Penney (Jc) Inc JCP 13.24% 9.83% 1.00 0.57 18.23 15.72
Denbury Res Inc DNR 13.16% 10.87% 0.58 0.50 23.14 19.71
Rowan Cos Inc RDC 12.83% 16.33% 0.61 0.75 17.13 10.82
Deere & Co DE 12.07% 11.21% 0.89 0.89 14.23 12.20
Cf Indus Hldgs CF 8.47% 8.95% 0.71 0.83 9.25 10.11
Cbs Corp CBS 7.55% 4.80% 0.76 0.37 15.80 12.51
Ak Steel Hldg AKS 6.75% 1.05% 0.20 0.10 19.16 10.68
Hess Corp HES 6.73% 5.12% 0.50 0.27 11.53 10.49
Discovery Com-A DISCA 6.46% 5.83% 0.70 0.64 18.14 14.85
Agilent Tech A 5.85% 4.89% 0.91 0.92 17.15 15.19
First Solar Inc FSLR 5.76% 0.62% 0.87 0.36 14.74 12.60
Marathon Oil Cp MRO 5.69% 4.24% 0.32 0.22 10.23 9.30
E Trade Finl Cp ETFC 5.61% 0.77% 0.15 0.08 24.78 15.49
Metropcs Commun PCS 5.60% 3.80% 0.13 0.04 14.92 12.34
Hormel Foods Cp HRL 5.56% 1.89% 1.00 0.33 16.47 15.97
Micron Tech MU 5.26% 2.44% 0.17 0.19 17.07 8.53
Titanium Metals TIE 5.20% 2.67% 0.50 0.25 27.36 18.69
Laboratory Cp LH 5.02% 4.76% 0.57 0.48 14.55 12.82
Interpublic Grp IPG 5.02% 4.12% 0.92 0.50 20.05 16.09


Biggest FY1 Revisions(Largest Declines)
Company Ticker %Ch
Curr Fiscal Yr Est - 4 wks
%Ch
Next Fiscal Yr Est - 4 wks
# Up-Dn/Tot
%Ch
Curr Fiscal Yr Est - 4 wks
# Up-Dn/Tot
%Ch
Next Fiscal Yr Est - 4 wks
P/E using
Curr FY Est
P/E using
Next FY Est
Goodyear Tire GT -38.49% -2.74% -0.56 0.00 21.82 7.99
Dean Foods Co DF -25.09% -24.60% -1.00 -0.54 17.22 13.25
Quanta Services PWR -16.84% -6.83% -1.00 -0.55 25.40 18.79
Newmont Mining NEM -14.82% -11.49% -0.59 -0.47 12.12 11.15
Allstate Corp ALL -11.61% -9.13% -0.76 -0.55 9.41 8.51
Amer Tower Corp AMT -10.83% -12.91% -0.93 -0.64 50.71 38.89
Nicor Inc GAS -10.46% -4.84% -0.50 -0.50 20.38 19.34
Noble Energy NBL -9.82% -5.43% -0.38 -0.06 20.45 15.33
Expedia Inc EXPE -9.09% -9.13% -1.00 -0.40 13.12 11.38
Sunoco Inc SUN -9.06% -8.50% -0.25 0.08 22.57 17.06
Sears Hldg Cp SHLD -8.86% 73.19% -0.29 0.17 81.85 70.45
Nrg Energy Inc NRG -8.39% -29.97% 0.10 -0.33 19.85 20.15
Urban Outfitter URBN -8.38% -6.67% -0.88 -0.48 18.01 15.10
Newfield Expl NFX -7.96% 0.06% -0.63 -0.26 15.08 12.23
Centurytel Inc CTL -7.29% -6.72% -0.79 -0.50 13.63 13.23
Edison Intl EIX -7.19% -6.45% -0.43 -0.27 13.45 14.41
Centerpoint Egy CNP -6.81% -2.93% -0.78 -0.50 14.67 13.27
Xl Group Plc XL -6.19% -1.03% -0.71 -0.25 10.84 9.96
Southwest Air LUV -5.89% 0.42% -0.38 -0.14 16.45 12.30
Public Sv Entrp PEG -5.78% -5.13% -0.50 -0.79 12.19 12.90
Whirlpool Corp WHR -5.17% -1.20% 0.20 -0.20 7.35 8.60


Data in this report, unless stated otherwise, is through the close on Thursday, March 17, 2011.

We use the convention of referring to the next full fiscal year to be completed as 2011, not all firms are on December fiscal years, this can cause discontinuities in the data. The data is based on FY1, not based on 2011, even though I may call it 2011 in the report. All numbers, including historical ones, reflect the current composition of the S&P 500, thus some historical numbers may differ from those reported by S&P which are based on the composition of the index at the time of the reports.
 


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