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Closing the Books on Q2 Earnings Season

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We are in-between earnings seasons at present, with the Q2 earnings close to the finish line and the Q3 reporting cycle still a few weeks away. Investors’ attention lately has squarely been on economic data, with a focus on what each report means for the likelihood of a Fed Taper at this month’s FOMC meeting.

The market’s positive response to the tepid August jobs report likely indicates that many in the market still believe that Taper is far from guaranteed. I don’t subscribe to that view as I see the totality of recent economic data, including the jobs report, as good enough to allow the Fed to start getting out of the QE business in the limited time available under Bernanke. With the next FOMC meeting just a week away, we will find out soon enough.   

The earnings season may no longer be front and center, but it isn’t (technically) over yet either, with 30 companies coming out with results this week, including 2 S&P 500 members. For all practical purposes, however, the Q2 earnings season is already over, with results from 497 S&P 500 companies already out (as of Friday, September 6th).

The remaining three reports are in the Retail and Consumer Discretionary sectors and this week’s reports from PVH Corp (PVH) and Kroger (KR - Free Report) take us very close to the finish line. Other notable reports this week include Hovnanian Enterprises , Men’s Wearhouse (MW) and Lululemon Athletica (LULU).

Most of the recent results have been from the Retail sector and they have broadly been on the weak side. The soft tone set by results from Wal-Mart (WMT), Macy’s (M) and others earlier in the sector’s reporting cycle largely remained in place, with most of the apparel and other soft-line retailers failing to impress. The Q2 earnings and revenue growth numbers for the sector aren’t bad; they are in fact better than what the sector produced in Q1 and the last few quarters.

But many more retailers came out short of expectations, with the earnings and revenue beat ratios for Q2 materially weaker than Q1 and the four-quarter average. The overall tone of guidance was on the weak side as well, prompting analysts to cut their estimates for the sector. Total earnings for the sector are expected to be up +3.9% in Q3 at present, down from +6.5% last week and +17.3% in mid-July.

The downward adjustment to Q3 expectations is fairly pronounced in Retail, but the issue is hardly confined this sector alone, as estimates have come down for all sectors. Total earnings in Q3 for the S&P 500 as a while are currently expected to up +1.4% from the same period last year, down from +1.9% last week and +5.2% in early July. Basic Materials, Industrials, and Technology are the other major sectors experiencing material negative estimate revisions.    

The Q2 Earnings Scorecard

Total earnings for the 497 S&P 500 companies that have reported results already are up +2.5%, with 62.6% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 494 companies up +1.9% and 50.1% beating revenue expectations, with a median revenue surprise of +0.2%.

The earnings growth rate of +2.5% compares to +2.3% earnings growth rate in Q1 and the 4-quarter average growth pace of +3.9% for the same set of 497 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, eventually caught on with historical levels. On the revenue side, the revenue beat ratio of 50.1% is decidedly better than what we saw in Q1 (41.9%) and the 4-quarter average (46.1%) for the same group of companies.

Strong results from the Finance sector played a big role in giving respectability to the aggregate Q2 data. It is very hard to be satisfied with the picture once Finance is excluded from the numbers.

Total Finance sector earnings are up 30% on 8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance’s performance has been way better than what we have seen from the group in recent quarters.

Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan (JPM), Bank of America (BAC), Key Corp (KEY) and alone accounts for more than 40% of the sector’s total earnings, were up +8.4% from the same period last year. Total earnings for the Major Banks still remained below the group’s record tally in Q1.

The insurance industry, the second largest contributor to Finance sector earnings, had to deal with tough comparisons, resulting in negative growth in Q2. The brokerage firms benefited from easier comps, with total earnings for the Brokerage/Investment Management industry up +16%.

Not So Good Outside Finance   

Strip out Finance and total Q2 earnings growth for the S&P 500 turns negative – down 2.9%. This is weaker than what these same companies reported in Q1. Weakness in the Technology sector spotlights the broad growth challenge outside of Finance, though Basic Materials (total earnings down 11.1%) and Energy (-12.7%) also played roles.

Total Technology sector earnings are down 10.1% on 0.4% higher revenues, the weakest performance from the sector in a while. Technology is a big area, ranging from hardware makers like Apple (AAPL) and Dell (DELL) to software vendors like Adobe (ADBE) and Microsoft (MSFT) and chipmakers like Intel (TM). The hardware and software industries individually bring in roughly 45% and 35% of the Technology sectors total quarterly earnings.

In Q2, the modestly positive growth for the software industry was more than offset by weakness at the hardware vendors. Had Technology been not such a big drag on overall results, the aggregate picture would be somewhat better. Excluding Technology, total S&P 500 earnings would be up 5.4% in Q2.

Expectations for Second Half & Next Year Remain Positive

The predominant negative tone of company guidance has started showing up in expectations for Q3 and the second half of the year. As a result, full-year 2013 earnings growth expectations have come down despite the typical positive earnings season outperformance in Q2. The recent downtrend in estimates notwithstanding, there is still plenty of room for estimates to come down.  

The chart below plots the current Q3 and Q4 growth expectations in the context of where growth has been over the last few quarters. The current +1.4% expected growth rate in Q3 is down from +1.9% last week and +5.2% in early July.


The chart below looks at the same data as is in the chart above, but takes Finance out of the numbers. As you can see, a lot of the expected growth in the second half of the year, particularly Q4, is from sectors outside of the Finance sector.

Given what we have seen thus far in Q2 and in the last few quarters from sectors outside of Finance (above chart), it doesn’t seem reasonable to expect a strong growth ramp up later this year. What this means is that we will see further acceleration in negative estimate revisions in the coming days as retailers and others guide lower towards Q3 and beyond.
Monday - 9/9

  • Nothing major on the economic calendar.
  • Hovnanian Enterprises will report earnings results in the morning, while PVH Corp (PVH) and Casey’s General Store (CASY - Free Report) will report after the close.
  • Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of earnings surprises, is showing Casey’s General Store coming out with a positive earnings surprise.  
  • Check Zacks ESP here

Tuesday - 9/10

  • Nothing major on the economic calendar.
  • Pep Boys – Manny, Moe & Jack (PBY) will report quarterly results in the morning, while Coldwater Creek (CWTR) will report after the close.

Wednesday - 9/11

  • Nothing major on the economic docket, while Men’s Wearhouse (MW) and Vera Bradley (VRA) will report quarterly results after the close.

Thursday - 9/12

  • Jobless Claims will be the only notable report today, but with the August jobs report already out, it may not have much resonance in the market.
  • Lululemon (LULU) and Kroger (KR - Free Report) will report results in the morning, while Ulta Salon (ULTA) will report after the close.

Friday - 9/13

  • There are no earnings reports today, but we have a relatively busy day on the economic calendar, with the August Retail Sales, PPI and University of Michigan Consumer Sentiment survey coming out.
  • Auto sales were quite strong in August, so it will be interesting to see how the ex-autos sales numbers compare to the preceding month. The expectation is for +0.3% ex-autos growth after the +0.5% growth in July.

Here is a list of the 30 companies reporting this week, including 3 S&P 500 members:

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
CASEYS GEN STRS CASY 1.24 1.01 4.76 Monday AMC
FIVE BELOW INC FIVE 0.09 0.04 25 Monday AMC
FLOW INTL CORP FLOW 0.01 0.05 300 Monday AMC
GENERAL FINANCE GFN 0.04 0.01 -72.73 Monday BTO
HOVNANIAN ENTRP HOV 0.06 -0.05 120 Monday BTO
INVESTORS RL ES IRET 0.18 0.16 11.76 Monday AMC
LIMONEIRA CO LMNR 0.44 0.45 -72.73 Monday AMC
PALO ALTO NETWK PANW -0.04 -0.18 -900 Monday AMC
PEREGRINE PHARM PPHM -0.05 -0.07 0 Monday AMC
PVH CORP PVH 1.37 1.25 39.42 Monday AMC
STREAMLINE HLTH STRM -0.03 0.01 38.46 Monday AMC
TRIANGLE PETROL TPLM 0.14 -0.02 40 Monday AMC
WILEY (JOHN) A JW.A 0.45 0.52 -16.47 Monday BTO
CHRISTOPHER&BNK CBK -0.02 -0.19 150 Tuesday BTO
COLDWATER CREEK CWTR -0.64 -0.56 13.16 Tuesday AMC
LANNETT INC LCI 0.07 0.06 40 Tuesday AMC
OXFORD INDS INC OXM 0.98 0.65 5.13 Tuesday AMC
PEP BOYS M M &J PBY 0.19 0.12 -85.71 Tuesday BTO
UNILIFE CORP UNIS -0.13 -0.21 -15.38 Tuesday AMC
CHINAEDU CP-ADR CEDU 0.14 0.1 -11.76 Wednesday AMC
MENS WEARHOUSE MW 1.15 1.15 18.18 Wednesday AMC
VERA BRADLEY VRA 0.33 0.33 4.55 Wednesday AMC
ANALOGIC CORP ALOG 999 1 -15.58 Thursday AMC
BRADY CORP CL A BRC 0.5 0.47 -6.78 Thursday BTO
KROGER CO KR 0.6 0.51 4.55 Thursday BTO
LULULEMON ATHLT LULU 0.35 0.36 6.67 Thursday BTO
NETSOL TECH INC NTWK 0.21 0.25 -13.64 Thursday BTO
ULTA SALON COSM ULTA 0.67 0.54 4.84 Thursday AMC
USA TECH INC USAT 0.02 -0.01 66.67 Thursday N/A
UTD NATURAL FDS UNFI 0.6 0.51 1.59 Thursday AMC

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