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Positive EPS & Revenue Surprises Hard to Come By

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We were unimpressed with the Q4 earnings season from the get go and that initial view has been confirmed by the bigger sample of reports we have seen since then. A few notable standout reports notwithstanding, the overall tone and substance of this earnings season is on the weak side.

Plenty of reports are still to come, with this week alone bringing in almost 400 earnings releases, including 121 from S&P 500 members. But with results from 113 S&P 500 members already out, the trends established already will most likely carry through the rest of this reporting cycle.

We will share the current scorecard and what’s on deck this week a little later, but let’s first point out the key trends that we have seen from the Q4 results that have come out through Friday, January 25th.

First, growth is decelerating. This isn’t a surprise, as we knew already that Q4 growth would be materially below the pace set in the first three quarters of the year.

Total earnings for the 113 index members that have reported are up +12.4% from the same period last year on +6.5% higher revenues. Earnings and revenue growth for the same cohort of companies had been +19.2% and +7.9% in the preceding earnings season. The comparison chart below puts this growth deceleration in a historical context for these 113 index members.

The growth pace is on track to decelerate even further in the current and coming quarters, as we will show a little later.

Second, companies appear to be struggling to beat consensus EPS and revenue estimates.

For the 113 index members that have reported results already, 67.3% are beating EPS estimates and only 58.4% are beating revenue estimates. For the same cohort of companies, the proportion of positive EPS and revenue surprises was 80.5% and 61.9% in the Q3 earnings season.

The comparison charts below put the Q4 beats percentages in a historical context for these 113 companies.

The lag on this front earlier on was more notable on the revenues side, with revenue beats tracking below historical periods. But as you can see above, EPS beats are even more notably tracking below historical periods. The fact is that the Q4 EPS and revenue beats percentages are the lowest since the fourth quarter of 2016. 

With Q4 positive surprises this hard to come by, one would reasonably assume that perhaps estimates had been too high. We know that wasn’t the case as estimates for the quarter had fallen the most of any other recent periods.

Third, estimates for 2019 Q1 and full-year 2019 are coming down in a major way, with the Q1 growth rate at risk of falling into negative territory.

The chart below shows how estimates for 2011 Q1 have evolved since late-November 2018.

The negative revisions to 2019 Q1 estimates are along the same lines that we saw ahead of the start of the Q4 earnings season as well. Estimates for full-year 2019 have been coming down as well, as the chart below shows.

This chart is tracking consensus earnings growth expectations since the second half of 2018 got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a consistent downtrend since early October. Many in the market suspect that estimates have further to drop before stabilizing.

Key Earnings Reports This Week

We have almost 400 companies coming out with quarterly reports this week, including 121 S&P 500 members.

Monday, January 28th: Caterpillar (CAT - Free Report) will be the more prominent of the three S&P 500 members reporting results on Monday. This trade-levered bellwether struggled last year and was down big following the last earnings release. The revisions trend has been stable-to-positive ahead of this earnings release.

Tuesday, January 29th: We have 37 index members reporting results on Tuesday, of which 20 will come out before the market’s open and the rest after the market’s close. There is no shortage of big-name reporters today, but Apple (AAPL - Free Report) will be the day’s highlight as the iPhone maker comes out with results after the market’s close. Estimates have come down notably since management’s negative preannouncement early this month. The stock is down big since the last earnings release on November 1st, which suggests that even modestly decent numbers will push it higher.

Wednesday, January 30th: Facebook (FB - Free Report) and Microsoft (MSFT - Free Report) will be the more prominent of the 27 S&P 500 members reporting results on Wednesday. It is amazing how market sentiment has shifted for these two tech bellwethers, with Facebook unable to get a break and Microsoft emerging as a cloud play. It will be interesting to see if Intel’s negative commentary about cloud spending is confirmed by Microsoft.

Thursday, January 31st: Amazon (AMZN - Free Report) will be the highlight on a very busy reporting day when 39 S&P 500 members are reporting results.

Friday, February 1st: Exxon (XOM - Free Report) and Chevron (CVX - Free Report) will be the more notable of the 15 index members on deck to report Q4 results on Friday.

Q4 Earnings Season Scorecard (as of Jan. 18th, 2019)

We now have Q4 results from 113 S&P 500 members that combined account for 27.6% of the index’s total market capitalization. Total earnings for these 113 index members are up +12.4% from the same period last year on +6.5% higher revenues, with 67.3% beating EPS estimates and 58.4% beating revenue estimates.

The table below shows the current scorecard.

We mentioned earlier how companies are struggling to beat EPS and revenue estimates. The last column of the scorecard table above shows the blended beats percentage; this is the proportion of these 113 index members that have beaten both EPS and revenue estimates.

The chart below puts the 43.4% blended beats percentage in a historical context.

For Q4 as a whole, combining the actual results from the 113 index members that have reported with estimates for the still-to-come 387 companies, total earnings for the S&P 500 index are expected to be up +11.2% from the same period last year on +5.4% higher revenues, which would follow the +25.7% earnings growth on +8.5% higher revenues in 2018 Q3.

Earnings growth is expected to be in double digits for 8 of the 16 Zacks sectors, with Energy (+66.2% growth), Finance (+19.2%), Construction (+23.8%) and Transportation (+28.3%) as the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +4.2%, after back-to-back quarters of very strong growth.

Three sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-7.5% decline), Autos (-15.3%), and Utilities (-7.5%).

The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.

The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters.

As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.

The chart below shows the same data on a rolling 4-quarter basis

Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.

For more details about the overall earnings picture, the Q4 earnings season and expectations for the coming periods, 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 and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.

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