The following is an excerpt from the weekly Earnings Trends article. To see the full article, please click here.
The 2014 Q2 earnings season is moving towards the finish line, with results from 480 S&P 500 members already out. The Retail sector offers the only remaining point of interest in the Q2 earnings season. But the roughly 80% of retailers in the S&P 500 that have reported results already give us a pretty good sense of what’s happening in the space.
It’s been tough for the retailers in recent quarters and Q2 is no different. Expectations were low to begin with and came down some more as the quarter unfolded. But retailers have been struggling thus far in Q2 to meet even these lowered estimates, with most companies missing estimates and lowering guidance for the current and coming quarters.
Total earnings for the 34 retailers in the S&P 500 out of the total 43 that have reported Q2 results are up +2.0% on +5.6% higher revenues, with only 44.1% beating EPS estimates and 52.9% coming ahead of top-line estimates. The previous quarter was tough on all sectors, including the retailers. But while other sectors have nicely bounced back from the Q1 levels, the Retail sector’s results don’t show much improvement, as the chart below shows.
The chart below compares the earnings and revenue growth rates for the retail sector companies that have reported results with what these same companies reported in other recent quarters. Please note that the 34 Retail sector companies whose results are reflected in the charts below account for 91.3% of the sector’s total market capitalization in the S&P 500 index.
The Q2 Scorecard
The weak Retail sector results notwithstanding, the Q2 earnings season has turned out to be better relative to other recent reporting periods. Total earnings for the S&P 500 are on track to reach a new all-time quarterly record. Importantly, strong earnings growth this quarter has been broad-based and driven by top-line gains, not just cost cutting.
Total earnings for the 480 S&P 500 members that have reported Q2 results already are up +8.1% from the same period last year on +4.4% higher revenues, with 65.6% beating EPS estimates and 61.0% coming out with positive revenue surprises. This is better performance than we have seen in other recent reporting cycles.
We have two sets of charts below – one compares the earnings and revenue growth rates for these 480 companies with what these same companies reported in 2014 Q1 and the 4-quarter average and the second chart compares the beat ratios for these companies.
Growth is Better
The aggregate growth picture is actually even better once the Finance sector’s anemic growth numbers are excluded. Excluding Finance, total earnings for the companies that have reported results are up +10.1% from the same period last year on +4.7% higher revenues.
And More Positive Revenue Surprises
The composite picture for Q2, combining the actual results from the 480 S&P 500 members that have reported with estimates for the still-to-come 20 companies, shows total earnings reaching a new all-time quarterly record, and increasing by +8.0% from the same period last year on +4.4% higher revenues. This is a material improvement over the preceding quarter, when total earnings and revenues were essentially flat.
Estimates for the 2014 Q3 have started coming down, with the current +3.7% total earnings growth expected in the current period down from +6.3% at the start of the quarter. But the magnitude of negative revisions in Q3 thus far is the lowest we have seen in more than a year. The chart below compares the magnitude of negative revision to 2014 Q3 estimates over the first seven weeks of the quarter to negative revisions over comparable periods in the preceding 5 quarters.
Weak results from the remaining companies, more than half of which are from the beleaguered Retail sector, which will likely put downward pressure on Q3 estimates. But even then, the magnitude of negative revisions for Q3 will be the lowest that we have seen in a while. If sustained over the next reporting season (Q3 earnings season), this will represent a material improvement in the corporate earnings picture.
The 2014 Q2 earnings season is presenting a much improved picture of the overall earnings picture relative to what we have become used to seeing in recent quarters.
Total earnings for the 480 S&P 500 members that have reported results are up +8.1% on +4.4% higher revenues, with 65.6% beating EPS estimates and 61.0% coming ahead of revenue estimates. This is better performance than we have saw from the same group of companies in recent quarters, with the revenue beat ratio notably impressive.
The Retail sector’s results have been no better than what we have been seeing in other recent quarters. Total earnings for the 79.1% of retail sector companies in the S&P 500 that have reported results are up +2.0% on +5.6% higher revenues. Most of the sector leaders like Wal-Mart (WMT - Analyst Report) , Target (TGT - Analyst Report) , Macy’s (M - Analyst Report) and others have guided lower for the current period.
Growth from the Technology sector has been the best in many recent quarters, with total earnings up +12.4% on +6.3% higher revenues. Other sectors with strong earnings performance include Medical (Up +15.7%), Construction (+14.2%), Utilities (+12.3%), Aerospace (+10.7%), Transportation (+11.5%), and Energy (+12.2%).
The Medical sector’s +15.7% earnings growth on +12.3% higher revenues is primarily due to strength at Gilead Sciences (GILD - Analyst Report) , but most of the sector companies have also come out with positive earnings and revenue beats. Easy comparisons at Verizon (VZ - Analyst Report) account for the Utilities sector’s strong growth numbers.
The composite Q2 picture for the S&P 500, combining the actual results from the 480 companies with estimates for the 20 still to come, is for earnings to be up +8.0% from the same period last year, on +4.4% higher revenues and 34 basis points in higher margins. Sequentially, total earnings for the S&P 500 are expected to be up +8%, with the overall level of total earnings for the index expected to reach a new all-time quarterly record.
The Q2 earnings is moving along nicely for the small-cap space as well, with results from 541 S&P 600 members or 90.8% of the index’s total membership already out. Total earnings for these 541 index members are up +12.4% on +9.8% higher revenues, with 48.8% beating EPS estimates and 37.9% coming ahead of top-line expectations.
The beat ratios for these 541 S&P 600 members are lower relative to what we have seen from this same group of companies in other recent quarters, but the earnings and revenue growth rates compare favorably to historical levels.
The top-down ‘EPS’ estimate for the S&P 500 is currently $117 for 2014 and $125 for 2015, while the bottom-up estimate are $116 and $130, respectively.
To see the full Earnings Trends article, please click here.
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