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Q4 Earnings Season Winding Down

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The following is an excerpt from this week's Earnings Trends report.  To access the full article, please click here.

The Retail sector dominates the later part of each reporting cycle and that has been the focus lately in the ongoing Q4 earnings season as well. There is some improvement in the sector’s earnings picture, likely a function of lower oil prices. But the gains aren’t as pronounced as one would expect from the market’s favorable reaction to the sector results thus far. Please note that Retail sector stocks are up the most compared to any other sector in response to Q4 results.

With results from 89.5% of the sector’s market cap in the S&P 500 index already out, total Retail sector earnings are up +5.3% on +5.5% higher revenues, with 73.3% beating consensus EPS estimates and 46.7% beating top-line estimates.

Except for the lower ratio of retailers beating revenue estimates, the earnings and revenue growth rates and the earnings beat ratios are modestly better than what we have been seeing from the same group of retailers in other recent quarters.

The chart below provides a comparison of the results for the 30 Retail sector companies in the S&P 500 index (out of 42 retailers in the index in total) with what we had seen from the same group of 30 retailers in 2014 Q3 and the average of the preceding four quarters.

The chart also spotlights the sector’s persistent margin woes (earnings growth is less than half the top-line gain), a function of the extremely promotional environment that all industry players have been complaining about. The issue will likely get even more pronounced with the Wal-Mart (WMT - Free Report) pay-hike announcement pressuring others like Target (TGT - Free Report) to follow suit.

Q4 Earnings Scorecard (as of February 25th, 2015)

Including this morning’s reports, we now have Q4 results from 465 S&P 500 members, with total earnings for these companies up +6.5% from the same period last year, with 68.5% beating earnings estimates. Total revenues are up +1.6%, with 55.9% beating top-line 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 a mixed picture. The charts below show the comparison of the results thus far with what we have seen from this same group of companies in other recent quarters.

We have discussed the Apple effect in this space before and the effect is very pronounced.

The charts below provide a side-by-side comparison of the Q4 earnings and revenue growth rates for the 465 S&P 500 companies that have reported results, with and without Apple in the numbers (the left side is with Apple and the right side is excluding Apple). The comparisons are with what we have seen from the same group of companies in 2014 Q3 and the average of the preceding four quarters.

We should keep in mind however that Apple isn’t the only ‘unusual’ factor this earnings season. Results from the Finance sector, particularly tough comparisons at Citigroup (C - Free Report) and J.P. Morgan (JPM - Free Report) , have been a drag on the aggregate growth picture as well. And then we have the whole oil situation, with profitability of the Energy sector companies following what has been happening to oil prices.

The chart below shows the results thus far excluding the effect of Apple and the Energy sector. As you can see, the earnings growth picture is broadly comparable with historical levels on this basis.

But irrespective of whether we look at the results as a whole or piecemeal, the weakness on the revenue side comes through – revenue growth rate is tracking below other recent quarters whether we look at the results with or without Apple, Finance or Oil.

The oil price impact hasn’t been restricted to the Energy sector alone, with the negative effects showing up as far away as in the Caterpillar (CAT - Free Report) report. The flip side of the oil story also makes sense and should start showing up in consumer-centric sectors/industries, though timing is hard to pin down. That said, the positive U.S. same-store sales numbers out of Wal-Mart likely indicate the positive impact of lower oil prices.

Estimates for Q4 had fallen more than normal due to the oil development and we are seeing the trend play out in a big way in estimate revisions for the current and following quarters. In fact, the magnitude of energy-driven negative revisions for 2015 Q1 and Q2 is so severe that the first half 2015 earnings growth rate for the S&P 500 index as a whole has evaporated in recent weeks.

The chart below shows what is happening to 2015 Q1 and Q2 earnings estimates for S&P 500 companies.

Energy is obviously the biggest drag on estimates for the first half of the year, but estimates beyond the Energy sector are also coming down. The hope is that over time we will start seeing the savings from lower energy prices show up in other sectors, particularly the retail and discretionary sectors. Those stocks have been showing these favorable expectations, though we have yet to see that show up in estimates.

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