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A Tale of Two Earnings Reports

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Wednesday, October 23, 2013

The stock market today appears ready to take a pause after steady gains in recent days. Stocks pushed higher on Tuesday despite the underwhelming government jobs report, with investors reading the labor market weakness as a further guarantee of continued Fed support. On the earnings front, we have two contrasting reports this morning from Caterpillar (
(CAT - Free Report) ) and Boeing ((BA - Free Report) ). Caterpillar’s bellwether status for the global construction and mining businesses will likely make the company’s weak outlook a bigger drag on sentiment today than the strength emanating from the Boeing report.

The Caterpillar miss was centered on its mining business where the company bulked up through Bucyrus acquisition at the top of the mining cycle. The mining weakness is more than offsetting the uptick in the construction and other non-mining businesses. Unlike Caterpillar’s woes, Boeing beat expectations and raised guidance on momentum in its 787 Dreamliner and broader commercial aircraft business, despite the Dreamliner’s much publicized glitches. Other notable reports this morning include positive surprises from Eli Lilly (
(LLY - Free Report) ), Bristol-Myers ((BMY - Free Report) ), and WellPoint (). Including this morning’s long line-up of reports, we now have Q3 results from 161 S&P 500 members that combined account for account for 39.8% of the index’s total membership.

Total earnings for these 161 companies are up +7.8%, with 67.1% beating EPS expectations. Total revenues are up +2.2% and 44.1% coming ahead of top-line expectations. The earnings and revenue growth rates have improved as more results have come out, though they still track below what this same group of companies reported in 2013 Q2. The composite earnings and revenue growth rates for Q3, combining the results for the 161 companies that have reported with the 339 still to come, are +2.5% and +0.9%, respectively. This means that Q3 is on track to be along the lines of what we saw in the last few quarters, likely no better or worse.

Expectations for 2013 Q4 have started coming down, but they still represent a material ramp up in growth pace, with total earning for the S&P 500 expected to be up +9.2%. Given the overall sub-par tone of company guidance thus far and the persistent negative trend in estimate revisions for more than a year now, it is reasonable to expect Q4 estimates to come down materially as the rest of Q3 reporting season unfolds. This morning's contrasting reports from the two bellwethers - Caterpillar and Boeing - shows that pockets of strength notwithstading, the overall earnings picture is far from satisfactory.

Sheraz Mian
Director of Research

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