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Q1 Earnings Season Takes the Spotlight

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Alcoa (AA) may no longer be as relevant to the U.S. economy and the stock market as it may have been at some stage in its long life. But the company’s name gets plenty of sunshine from the widely-held belief that its earnings report kick-stars each quarterly reporting cycle. Many in the market even see the company’s earnings report as a leading indicator of what to expect from the rest of corporate America. But that is most likely overstating the company’s bellwether status, notwithstanding aluminum’s significance to the automotive, aircraft manufacturing and construction end markets.

The bottom line is that the relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Results the day after Alcoa’s report from railroad operator CSX Corp (CSX - Free Report) and industrial nuts-and-bolts supplier Fastenal (FAST - Free Report) have a lot more relevance to the economically sensitive parts of the U.S. economy. In total, we will get results 14 S&P 500 members this week, including all the money center banks.

The chart below shows the weekly calendar of Q1 earnings reports for the S&P 500 index.

Here are this week’s key earnings reports

Monday (4/11): Alcoa is the key report today after the close, with the company expected to earn 2 cents in EPS on $5.3 billion in revenues. Estimates have been under pressure given the commodity price headwinds, with the current EPS estimates one-third of what was expected three months back. The stock has responded negatively to recent earnings releases irrespective of whether the surprises were positive or otherwise.

Tuesday (4/12): Fastenal is the key report in the morning while CSX Corp will report after the close. Fastenal is expected to earn 44 cents on $975 million in revenues compared to EPS of 43 cents on $953 million in revenues in the year-earlier quarter. CSX is expected to report 37 cents in EPS on $2.7 billion in revenues vs. 45 cents EPS on $3.02 billion in revenues in the year-earlier quarter. Estimates and the stock have been under pressure lately given headwinds from the weakness in coal and overall soft demand backdrop from the manufacturing sector.

Wednesday (4/13): J.P. Morgan (JPM - Free Report) will report results before the market’s open, with the bank expected to earn $1.26 in EPS on $23.9 billion in revenues, which will compare to $1.45 in EPS on $24.1 billion in revenues in the 2015 quarter. J.P. Morgan shares are down almost -12% year to date on the back of the broadly unfavorable backdrop for the major banks (Finance has been the weakest performing sector of the market year to date).

J.P. Morgan and its peers have been weighed down by the flattening yield curve, a weak capital markets and investment banking business as a result of heightened market volatility and rising estimates of provision expenses as a results of the Energy sector’s deteriorating credit profile. J.P. Morgan’s Q1 EPS estimate of $1.26 is down -17% from what was expected two months back. For the Finance sector as a whole, total Q1 earnings are expected to be down -10.7% on -4.7% lower revenues.

Thursday (4/14): Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) are the key reports in the morning, while Delta Airlines (DAL - Free Report) reports after the close. Delta is expected to earn $1.29 in EPS on $9.24 billion in revenues vs. EPS of 44 cents on $9.4 billion in revenues in the year-earlier period.

Friday (4/15): Citigroup (C - Free Report) is the key report in the morning, with the bank expected to earn $1.04 in EPS on $17.7 billion in revenues vs. $1.39 in EPS on $19.7 billion in revenues in the March 2015 period.

Here are four key points to know about the Q1 earnings season.

First, Q1 estimates fell sharply over the last three months and are continuing to come down. Total earnings for the quarter are expected to be down -11.1% on -2.3% lower revenues. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors, including Technology and Finance, the two largest in the index.

Second, the negative earnings growth in Q1 will be the fourth quarter in a row of earnings declines for the S&P 500 index. The headwinds remain unchanged from other recent periods, essentially a combination of Energy sector weakness, the dollar strength and global growth constraints. Please note that Q1 earnings growth would still be in the negative even on an ex-Energy basis.

Third, the magnitude of negative revisions that Q1 estimates suffered over the last three months has been the highest of all recent quarters in the comparable periods. Fresh weakness in oil prices at the start of the period was no doubt a big driver of pushing estimates down. But Energy isn’t the only sector that suffered negative revisions. In fact, estimates fell for 14 of the 16 Zacks sectors since the start of the period, with only two sectors (Utilities & Retail) experiencing modest positive revisions.  

Fourth, the growth challenge isn’t restricted to Q1 or the preceding few quarters; it is actually no better for the current and following quarters either. Total 2016 Q2 earnings are currently expected to be down -5.5% on -2.1% lower revenues, a growth pace that will go down more in the coming days as companies report Q1 results and guide lower for Q2. All of this year’s growth has effectively evaporated, with the modest positive growth for 2016 as a whole entirely a function of current expectations for the last quarter of the year.

The Ever Falling Estimates

Estimates for 2016 Q1 started coming down at an accelerated pace as companies predominantly guided lower on the 2015 Q4 earnings calls, consistent with the trend we have been seeing for more than two years now. Total Q1 earnings for companies in the S&P 500 are currently expected to be down -11.1% from the same period last year, a material decline from the -1.1% decline expected at the start of the quarter.

The table below presents the summary picture for 2016 Q1 contrasted with what companies actually reported in the 2015 Q4 earnings season.

The chart below shows how estimates for 2016 Q1 have evolved since the quarter got underway. Please note that the magnitude of negative revisions for Q1 is the highest we have seen at comparable periods in other recent quarters, with the Energy sector as the biggest drag.

The chart below shows current quarterly earnings growth expectations for the index 2016 Q1 and the following four quarters contrasted with actual declines in the preceding two quarters. As you can see, growth is expected to be negative in 2016 Q2 and barely in positive territory in the following quarter.

Q1 Earnings Scorecard

Alcoa’s claim to be the kick-starter of the earnings reporting cycle notwithstanding, the Q1 earnings season has already been underway for the last few weeks. The tally totals 22 S&P 500 members with fiscal quarters ending in February that have reported results already. Total earnings for these 22 index members are down -6.2% from the same period last year on +3.5% higher revenues, with 86.4% beating EPS estimates and 59.1% beating revenue estimates.

The table below shows the current scorecard for these companies

The charts below compare the results thus far with what we have been seeing from the same group of 22 index members in other recent periods.

This is too small a sample to draw any firm conclusions from, but more companies are able to beat EPS and revenue estimates at this stage though the growth pace is on the weaker side. We will see in the coming days if this trend can stay in place.

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Note: For a complete analysis of 2016 Q1 estimates, please check out weekly Earnings Trends report.

Here is a list of the 34 companies reporting this week, including 14 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
Supercom Ltd SPCB 0.06 0.21 0.00% Monday BTO
Alcoa Inc AA 0.02 0.28 33.33% Monday AMC
Bank Ozarks OZRK 0.54 0.47 1.79% Monday AMC
Grupo Aval Sa AVAL N/A 0.18 N/A Tuesday N/A
Fastenal FAST 0.44 0.43 -2.50% Tuesday BTO
Perry Ellis Int PERY 0.35 0.07 300.00% Tuesday BTO
Staffing 360 Sl STAF -0.28 N/A N/A Tuesday BTO
Csx Corp CSX 0.37 0.45 4.35% Tuesday AMC
Adtran Inc ADTN 0.08 0.07 225.00% Tuesday AMC
Davidstea Inc DTEA 0.37 N/A -33.33% Tuesday AMC
Layne Christens LAYN -0.33 -1.15 -94.44% Tuesday AMC
Jpmorgan Chase JPM 1.26 1.45 7.14% Wednesday BTO
Commerce Bancsh CBSH 0.63 0.58 -1.56% Wednesday BTO
Titan Machinery TITN -1.38 -0.2 0.00% Wednesday BTO
Dominion Diamnd DDC N/A 0.33 83.33% Wednesday AMC
Pier 1 Imports PIR 0.21 0.37 8.33% Wednesday AMC
Infosys Ltd INFY 0.23 0.22 0.00% Thursday N/A
Bank Of Amer Cp BAC 0.23 0.27 3.70% Thursday BTO
Blackrock Inc BLK 4.35 4.89 -1.45% Thursday BTO
Delta Air Lines DAL 1.29 0.45 -0.84% Thursday BTO
Progressive Cor PGR 0.51 0.46 12.50% Thursday BTO
Pnc Finl Svc Cp PNC 1.7 1.75 3.89% Thursday BTO
Wells Fargo-New WFC 0.98 1.04 0.98% Thursday BTO
Banco Latinoame BLX N/A 0.74 -21.33% Thursday BTO
First Rep Bk Sf FRC 0.81 0.71 0.00% Thursday BTO
Shaw Comms-Cl B SJR 0.26 0.31 -8.57% Thursday BTO
Cherokee Inc CHKE 0.14 0.19 0.00% Thursday AMC
Customers Bancp CUBI 0.55 0.49 18.37% Thursday AMC
Reynolds Amer RAI 0.5 0.43 0.72 Friday N/A
Seagate Tech STX 0.62 1.08 13.66 Friday N/A
Citigroup Inc C 1.04 1.52 1.92% Friday BTO
Regions Finl Cp RF 0.19 0.16 10.53% Friday BTO
First Hrzn Natl FHN 0.2 0.18 -4.76% Friday BTO
Xura Inc MESG 0.04 0.56 50.89% Friday BTO