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Are Q3 Earnings Results Really Good?

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We get into the heart of the Q3 earnings season this coming week, with more than 600 companies reporting results, including 154 S&P 500 members. With results from almost 17% of the index’s total membership already out, we have a pretty good sense about the quarter thus far. But we will have reached close to the mid-point of the Q3 reporting cycle, for the large-cap stocks at least, by the end of this week.

As we mentioned here last week, the banks gave us a good start to the Q3 earnings season, with the market appreciating (and rewarding) the money-center banks and brokers for their results. The picture is mixed for the regional banks, with stocks of a number of regional banks like PNC Financial (PNC - Free Report) , KeyCorp (KEY - Free Report) and others losing ground following quarterly releases that showed weak loan growth and signs of funding pressure. Results from the trust banks like Northern Trust (NTRS - Free Report) , State Street (STT - Free Report) also failed to impress.

Beyond these small pockets of weakness, the overall picture coming out of Q3 earnings season is one of all-around strength, with the growth pace of the first-half of the year continuing into Q3, and management commentary about underlying business conditions still favorable. Also, estimates for the current period (2018 Q4) appear to be holding up pretty well, though it is admittedly early on that front.

We have more details about the Q3 results below, but let’s discuss what’s on the docket for the week first.

Key Earnings Reports (for the week of October 22nd)

We have a busy reporting week, with more than 600 companies coming out with quarterly results, including 154 S&P 500 members. By Friday, we will have seen results from almost 47% of the S&P 500 members.

Halliburton (HAL - Free Report) – Haliburton reports quarterly results before the market’s open on Monday, October 22nd, with the company expected to earn 49 cents per share on $6.13 billion in revenues, representing year-over-year gains of +16.7% and +12.6%, respectively.

The stock has been a laggard this year, down -21.6% in the year-to-date period, underperforming the Zacks Energy sector’s +0.3% gain and the S&P 500 index’s +3.6% gain in the same time period. Estimates for the period have been steadily coming down, reflecting pause in North American activity levels, an area of major exposure for the company. Results from Schlumberger (SLB - Free Report) confirmed the North American weakness, as it showed international gains helping soften this weakness.

Caterpillar (CAT - Free Report) – Caterpillar is expected to report results before the market open on Tuesday, October 23rd, with the company expected to earn $2.83 per share on $13.2 billion in revenues. Earnings per share for the quarter will be +45.1% higher from the year-earlier period, while revenues would be up +15.8% from the same quarter last year.

The stock has struggled this year as sentiment has been hurt by macroeconomic and trade-related uncertainties. Caterpillar shares are down -15.7% in the year-to-date period, underperforming even the Zacks Industrial Products sector that is down -13.9% in the same period.

Trade aside, a key worry in the market is about the current cycle, with many suspecting that we are peak levels already and the situation will only get worse going forward. I don’t subscribe to this view, but, coupled with trade uncertainty, this is the primary reason for Caterpillar’s multiple suppression.

Twitter (TWTR - Free Report) – Twitter reports before the market open on Thursday, October 25th, with the company expected to post $0.14 in EPS on $703.7 million in revenues, up +40% and +19.4% from the year-earlier levels, respectively. But far more than EPS and revenues, the market will be looking for trends in monthly active users (MAUs), which many in the market believe have hit a wall.

The stock was down big following the June-quarter report when MAUs reached 335 million, down from 336 million in the preceding period. The current Zacks Consensus is for MAUs dropping to 330 million.

Twitter and Facebook (FB - Free Report) are faced with a host of other challenges as well, including greater regulatory scrutiny and margin pressures, given the need to spend more to comply with new regulations. Facebook doesn’t report Q3 results til October 30th.

Other notable reports this week include Microsoft (MSFT - Free Report) on Wednesday, October 24th, and Intel (INTC - Free Report) , Alphabet (GOOGL - Free Report) and Amazon AMZN after the market close on October 25th

Q3 Earnings Season Scorecard (as of Friday, October 19th)

We now have Q3 results from 84 S&P 500 members, or 16.8% of the index’s total membership, that combined account for 22.3% of the index’s total market capitalization. Total earnings for these 84 companies are up +19.2% from the same period last year on +8.4% higher revenues, with 82.1% beating EPS estimates and 61.9% beating revenue estimates.

The proportion of these companies beating both EPS and revenue estimates is 54.8%.

The comparison charts below put results from these 84 index members in a historical context:

As you can see, the growth pace is about in-line with what was expected. It is below what we had seen in the first half of the year, but analysts had been looking for it. The one metric in these charts that really stands out is the proportion of positive revenue surprises, which is tracking below what we have been seeing in other recent periods.

You can see this even better in the chart below, where we are only comparing the revenue performance for the 84 S&P 500 members that have reported results already:

The fact is that the 61.9% beats percentage for these 84 index members is the lowest we have seen since the first quarter of 2017.

Overall Expectations for 2018 Q3

The blended earnings growth expectation for the quarter has been steadily going up in recent days as companies come out with better-than-expected results. Combining the actual results for the 84 companies with estimates for the still-to-come 416 index members, total S&P 500 earnings are expected to be up +19.2% from the same period last year on +7.2% higher revenues.

As you can see in the year-over-year quarterly earnings growth chart for the S&P 500 index below, the Q3 growth pace represents a deceleration from what we saw in the first half of the year, but it is nevertheless very strong.

 

If we look at earnings growth for the S&P 500 index on a rolling 4-quarter basis, to smooth out the quarter-to-quarter variation, then the growth acceleration trend remains in place through 2018 Q4 before starting to trend down next year, as the chart below shows:

For more details about the overall earnings picture and the Q3 earnings season, please check our weekly Earnings Trends report.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.



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