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Earnings Preview

The Q1 earnings season provided further confirmation of the all-around weak earnings picture. While an above average proportion of companies were able to beat consensus expectations, the growth challenge proved widespread and not just a function of the beleaguered Energy sector. Earnings growth remained in negative territory for the 4th quarter in a row of earnings declines, with the trend expected to continue in the current period as well.

On the positive side, the dollar drag started fading and the magnitude of negative revisions for the current period turned out to be less severe relatively to other recent quarters. Estimates for Q2 faithfully followed the well-trodden path of previous quarters, as the chart below shows.

As negative as this revisions trend looks, it is nevertheless an improvement over what we had seen in the comparable period in the preceding earnings cycle. The improved commodity-price backdrop and the reduced dollar drag are some of the more plausible explanations for this development. But it is also likely that Q2 estimates had already fallen enough at the time when Q1 estimates were coming down and there is simply not that much need for further downward adjustments.

Whatever the reason for the lower negative revisions trend for Q2 estimates, it is nevertheless a potentially positive development, particularly if sustained over the coming months. We will have to wait till July to get a better read on this development after companies start reporting June quarter results and guide towards Q3 estimates. Current estimates for Q3 are showing essentially flat growth from the year-earlier level.

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

The only meaningful positive earnings growth this year is expected to come from the last quarter of the year, which is then expected to continue into 2017 when earnings for the S&P 500 index are expected to be up in double-digits. We will see if those estimates will hold up as we reach the last quarter of the year. But given what we have seen over the last few quarters, the odds don’t look that favorable.

Retail Sector’s Q1 Scorecard

With Kroger (KR - Analyst Report) as the only retailer in the S&P 500 yet to report Q1 results (it reports on June 16th), the reporting cycle has practically ended for the sector. Total Q1 earnings for the retailers that have reported results are up +3.3% from the same period last year on +6.1% higher revenues, with 71.4% beating EPS estimates and 50% beating revenue expectations.

Positive surprises are more numerous even for the Retail sector, as you can see in the right-hand side chart below.

The growth picture emerging from the left-hand side chart doesn’t look so bad, with earnings growth in positive territory and revenue gains tracking above historical periods. But a lot of that momentum is a function of non-department store results that came out earlier in this cycle, particularly from online vendors like Amazon (AMZN - Analyst Report) . The sector’s growth comparisons don’t look so good on an ex-Amazon basis, as the right-hand side chart below does.

Q1 Earnings Scorecard (As of Friday, June 3rd)

With results from just four S&P 500 members still awaited at this stage, the Q1 reporting cycle is practically now behind us. The still-to-report list is comprised of Brown-Forman (BF.B - Analyst Report) , J.M. Smucker (SJM - Analyst Report) , H&R Block (HRB - Analyst Report) , and Kroger (KR - Analyst Report) , with the first three reporting this week.

For the 496 index members that have reported results already, total earnings are down -6.6% from the same period last year on -0.9% lower revenues, with 70.7% beating EPS estimates and 55.4% beating revenue estimates. The percentage of companies that are able to beat both EPS and revenue estimates is tracking 45.5% at this stage.

The composite (or blended) picture for Q1, combining the actual results with estimates for the still-to-come reports, is for earnings decline of -6.5% on -1.3% lower revenues, as the table below shows.

The charts below compare the results thus far with what we have been seeing from the same group of 496 index members in other recent periods.

As referred to earlier, the two key takeaways from the results thus far are:

First, the growth challenge is not only very obvious, but also widespread. The Energy sector is no doubt dragging the reported growth pace quite a bit, but the growth comparison still remains unfavorable even if we exclude the reported Energy sector reports from the sample of reported results. The right-hand side chart below presents the growth picture on an ex-Energy basis.

Second, positive surprises are more numerous, particularly on the revenues side. The big driver of this is the low levels to which estimates had fallen ahead of the start of this earnings season. But as indicated earlier, the improving dollar is helping matters to some extent as well.

This incidence of more numerous positive surprises is visible in the ‘blended’ beats comparisons as well; ‘blended beats’ refer to companies that beat both revenues as well EPS estimates. At present, 45.5% of the 496 S&P 500 members that have reported results are beating both EPS and revenue estimates, which is better than what we saw from the same group of companies in the preceding quarter as well as the 4-quarter and 12-quarter averages.

Even the beleaguered Basic Materials and Industrial Products sectors have beat EPS and revenue estimates more often this time around compared to other recent periods. The proportion of Basic Material sector companies that have beat both EPS and revenue estimates in Q1 is 36.8%, which compares to 4-quarter and 12-quarter averages of 9.2% and 21.9%, respectively. The highest blended beat % are for the Construction, Conglomerates, and Aerospace sectors while the lowest is for Utilities.

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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 51 companies reporting this week, including 3 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
XCERRA CORP XCRA 0 0.1 40.00% Monday BTO
UTD NATURAL FDS UNFI 0.66 0.78 2.08% Monday AMC
THOR INDS INC THO 1.45 1.19 56.45% Monday AMC
SIGMA DESIGNS SIGM -0.11 0.06 80.00% Monday AMC
XACTLY CORP XTLY -0.21 N/A -5.26% Monday AMC
COVISINT CORP COVS -0.08 -0.08 0.00% Monday AMC
LAYNE CHRISTENS LAYN -0.34 -0.55 -63.64% Monday AMC
HD SUPPLY HLDGS HDS 0.47 0.33 12.50% Tuesday BTO
MICHAELS COS MIK 0.36 0.32 3.57% Tuesday BTO
NAVISTAR INTL NAV -0.17 -0.57 48.05% Tuesday BTO
VINCE HOLDNG CP VNCE -0.11 0.06 85.71% Tuesday BTO
ADV DRAINAG SYS WMS -0.01 0 100.00% Tuesday BTO
HOOKER FURNITUR HOFT 0.46 0.32 -5.00% Tuesday BTO
IAO KUN GROUP IKGH N/A 0.13 85.71% Tuesday BTO
VALEANT PHARMA VRX 1.42 2.34 -4.92% Tuesday BTO
DAVE&BUSTRS ENT PLAY 0.59 0.46 23.26% Tuesday AMC
OXFORD INDS INC OXM 1.35 1.3 3.81% Tuesday AMC
SEACHANGE INTL SEAC -0.2 -0.24 -1000.00% Tuesday AMC
HEALTHEQUITY HQY 0.13 0.09 25.00% Tuesday AMC
DULUTH HOLDINGS DLTH 0.07 N/A 27.59% Tuesday AMC
VERIFONE SYSTMS PAY 0.44 0.37 5.26% Tuesday AMC
VERINT SYSTEMS VRNT 0.22 0.43 -25.77% Tuesday AMC
UQM TECH INC UQM -0.03 -0.03 0.00% Tuesday AMC
BROWN FORMAN B BF.B 0.73 0.66 1.08% Wednesday BTO
LULULEMON ATHLT LULU 0.3 0.34 6.25% Wednesday BTO
GREIF INC GEF 0.57 0.53 21.21% Wednesday BTO
POINTER TELOCAT PNTR 0.14 0.29 26.67% Wednesday BTO
TAILORED BRANDS TLRD 0.43 0.54 34.78% Wednesday AMC
ABM INDUSTRIES ABM 0.28 0.37 46.15% Wednesday AMC
FERRELLGAS -LP FGP 0.55 0.43 -32.56% Wednesday AMC
STREAMLINE HLTH STRM -0.11 -0.12 -28.57% Wednesday AMC
RESTORATION HDW RH 0.05 0.23 -28.78% Wednesday AMC
FUELCELL ENERGY FCEL -0.4 -0.48 -37.14% Wednesday AMC
DAVIDSTEA INC DTEA 0.04 -0.14 31.25% Wednesday AMC
MITCHAM INDS MIND -0.34 -0.02 -90.91% Wednesday AMC
SMUCKER JM SJM 1.19 0.98 8.64% Thursday BTO
VAIL RESORTS MTN 4.2 3.56 7.53% Thursday BTO
CROWN CRAFTS CRWS 0.23 N/A -4.55% Thursday BTO
FRANCESCAS HLDG FRAN 0.17 0.17 5.88% Thursday BTO
CHRISTOPHER&BNK CBK -0.09 -0.04 -100.00% Thursday BTO
BLOCK H & R HRB 3.17 N/A -30.77% Thursday AMC
CAPSTONE TURBIN CPST -0.31 -1 5.56% Thursday AMC
CHEROKEE INC CHKE 0.42 0.41 35.71% Thursday AMC
ARI NETWORK SVC ARIS 0.02 0.02 0.00% Thursday AMC
ORGANOVO HLDGS ONVO -0.11 N/A 0.00% Thursday AMC
KMG CHEMICALS KMG 0.39 0.35 14.29% Thursday AMC
MATTRESS FIRM MFRM -0.04 0.33 -5.36% Thursday AMC
LIMONEIRA CO LMNR 0.2 0.17 -222.22% Thursday AMC