The following is an excerpt from this week's Earnings Trends article. To see the full article, please click here.
Soft results from the major banks have given the 2014 Q4 earnings season an uneven start. But the picture appears to be relatively better outside of the Finance sector, even though the sample size of reports outside of Finance may not be representative enough at this stage.
The weak banking results didn’t come totally as a surprise, as a combination of low interest rates, capital markets weakness and the never-ending string of legal charges continue to offset gains in investment banking and even the loan portfolios. Banks remain well placed to benefit from the improving U.S. economy as we are starting to see in improving loan demand, both from households as well as the corporate sector. But the low interest rate backdrop continues to remain a drag.
Total earnings for the Major Banks industry, which includes all the universal banks and alone accounts for roughly 40% of the Finance sector’s earnings, are down -13.7% from the same period last year on -4% lower revenues, with only a quarter of the major banks beating earnings and revenue estimates. This is weaker performance from these four banking giants relative to what we have seen from then in other recent earnings seasons.
With these four universal banks – J.P. Morgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) , Bank of America (BAC - Free Report) and Citigroup (C - Free Report) – accounting for almost three quarters of the Major Banks industry’s market capitalization, the industry’s aggregate earnings performance isn’t expected to materially improve from current levels. No doubt, stocks of the big banks have been under pressure lately, with the Zacks Major Banks industry lagging the broader market in the year-to-date period.
The table below gives the Finance sector’s scorecard at the constituent medium (or M-level) industries.
The Q4 Scorecard (as of January 15, 2015)
Including all of Thursday’s reports, we now have Q4 results from 36 S&P 500 members that combined account for 11.8% of the index’s total market capitalization. Total earnings for these 36 companies are up +0.6% from the same period last year, with 69.4% beating earnings estimates. Total revenues are up a relative better +2.1%, with 44.4% beating top-line estimates.
Finance remains a drag on the aggregate growth picture at this admittedly early stage, with the growth rates notably improving once Finance is excluded from the numbers. Excluding Finance, total earnings are up +17.4%, on +5.7% higher revenues, with 73.3% beating earnings and 50% beating revenue estimates.
Comparing the results thus far with what we have been seeing from the same group of companies in other recent quarters in terms of growth rates, beat ratios, and guidance presents somewhat of a mixed picture. The earnings and revenue growth rates for the 36 S&P 500 that have reported results are tracking below what we have seen from this group of companies in other recent quarters. With respect to beat ratios, a bigger proportion of companies are beating earnings estimates at this stage relative to other recent quarters, while the revenue beat ratios are on the low side.
Earnings beat ratios are about in-line with recent history, though revenue surprises are a bit on the weak side. And with no improvement on the guidance front, estimates for Q4 have starting coming down along the familiar negative revisions trend that we have been seeing quarter after quarter for more than two years now.is not be big enough to ensure broad for evaluation purposes.
The Complete Estimates Picture
We should keep in mind however that it is still early going for the Q4 earnings season. The reporting cycle accelerates next week and really ramps up the following week, with roughly 40% of the S&P 500 members coming out with results in the following two weeks. Looking at the composite Q4 estimates, combining the actual results from the 36 companies that have reported with estimates for the still-to-come 464, total earnings for the index are expected to be up +1.3% on -0.7% lower revenues.
Estimates for the quarter have been relatively stable lately, but they came sharply in the first two months of the period, with current expectations of +1.3% total earnings growth down from +9.6% growth expected in late September. The chart below shows how estimates for the quarter have evolved over the past three months.
Estimates for 13 out of 16 sectors have declined, though revisions for the Energy, Basic Materials and Autos sectors have been the most pronounced. The chart below shows the sectors with the major negative estimate revisions.
The green bars in the chart above show the earnings growth rate that was expected for each of those sectors at the beginning of Q4 while the orange bar shows what that expected growth rate is at present. As you can see, negative revisions to the Energy sector estimates really stand out. In fact, the Energy sector alone accounts for roughly 45% of all negative revisions to the bottom-up estimates for the S&P 500 index. The negative revisions trend is broad based, but the magnitude of Q4 revisions wouldn’t be as pronounced had it not been for the Energy sector.
The Zacks Consensus EPS estimates for Exxon (XOM - Free Report) , Chevron (CVX - Free Report) and ConocoPhillips (COP - Free Report) for the December quarter have fallen by -20.1%, -30.5% and -45.6% since the quarter started – no doubt the overall Q4 growth rate for the sector has flipped from a positive growth rate of +7% to a decline of -22.1% at present.
To see the full Earnings Trend article, please click here.
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