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Zacks Earnings Trends Highlights: Citigroup, Johnson & Johnson, IBM and General Electric

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For Immediate Release

Chicago, IL – January 26, 2018 – Zacks Director of Research Sheraz Mian says, "Q4 earnings season is showing very strong revenue momentum, an above-average proportion of positive surprises and an unusually positive revisions for the current and coming quarters."

4 Things to Know About Q4 Earnings Season

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

•    The preponderance of one-time charges aside, the Q4 earnings season is showing a very strong revenue momentum, an above-average proportion of positive surprises and an unusually positive revisions trend for the current and coming quarters.

•    Total Q4 earnings for the 89 S&P 500 members that have reported results are up +8.6% from the same period last year on +7.7% higher revenues, with 80.9% beating EPS estimates and 74.2% beating revenue estimates.

•    While the earnings growth pace at this stage is modestly weaker than other recent periods, there is clear momentum on the revenue side, both in terms of growth as well as more numerous revenue beats.

•    The Finance sector’s results have been relatively on the weak side in Q4. Excluding the Finance sector, earnings and revenue growth for the rest of the index start tracking better relative other recent periods.

•    As expected, companies are announcing big one-time charges related to the tax law change, which is making the gap between adjusted operating earnings and GAAP earnings the highest in recent years.

•    For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +10.8% from the same period last year on +7.3% higher revenues. Earnings growth is expected to be positive for 14 of the 16 Zacks sectors, with double-digit growth for the Energy, Technology, Construction, Industrial Products, Basic Materials and Autos sectors.

•    Q4 earnings growth for the Energy sector is the highest of all sectors, with total earnings for the sector expected to be up +187.1% from the same period last year on +26.1% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up +8.1%.

•    Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up +14.4% on +9.1% higher revenues. Finance sector earnings are expected to be up +8.7% on +2.1% year-over-year growth in revenues.

•    For the small-cap S&P 600 index, we have Q4 results from only 8.2% of its members, with earnings up +22.1% on +15.4% higher revenues and the proportion of positive EPS and revenue surprises at 61.2% and 57.1%, respectively. Please check page 26 through 29 of the full report for more details on the small-cap index.

•    Earnings estimates for the current period (2018 Q1) and following quarters have started going up in a notable way, with tax law changes as the most notable reason for the positive revisions. The positive revisions are broad-based and not restricted to the Energy sector, with estimates for 15 of the 16 Zacks sectors up since over the last few weeks.

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.5% on +5.0% higher revenues, which would follow +0.7% earnings growth on +2.5% higher revenues in 2016. Index earnings are expected to be up +16.4% in 2018 and +9.6% in 2019.

Q4 Scorecard (as of January 24th, 2018)

We now have Q4 results from 89 S&P 500 members that combined account for 24.9% of the index’s total market capitalization. Total earnings for these 89 index members are up +8.6% from the same period last year on +7.7% higher revenues, with 80.9% beating EPS estimates and 74.2% beating revenue estimates.

The Q4 earnings growth pace for these 89 companies is tracking below what we had seen from the same group of companies in the preceding period as well as the 4-quarter average. The revenue growth pace as well as the proportion of positive EPS and revenue surprises are tracking above historical periods.

Here are the four key trends emerging out of the Q4 earnings season:

First, there is clear momentum on the revenue front, with both the growth pace as well as the proportion of positive top-line surprises tracking above historical periods. 

Second, an above-average proportion of companies are beating EPS and revenue estimates. A high proportion of positive surprises is typically not a big deal given management teams’ expertise in anchoring expectations at easy-to-beat levels. We typically see this show in lowered estimates ahead of the start of earnings seasons. But what makes this above-average proportion of positive surprises notable is the fact that estimates for Q4 had held up very nicely ahead of this earnings season.

Third, the gap between adjusted operating earnings and GAAP earnings is extremely high.

The all-around one-time charges this earnings season pertain to the accounting impact of tax-law changes, which we are stripping out of our (adjusted) earnings numbers for comparability reasons. The chart above shows that adjusted earnings have historically been 4% to 9% higher than GAAP earnings for the 89 index members that have reported results already, but they are an extremely high 99% higher in Q4.

The issue is widespread and not restricted to one sector. For example, Citigroup (C - Free Report) reported adjusted earnings of $3.38 billion while its GAAP earnings were a loss of $18.3 billion. Johnson & Johnson’s (JNJ - Free Report) adjusted earnings for the quarter of $4.8 billion compare to its GAAP loss of $10.7 billion. IBM (IBM - Free Report) has a similar divergence between adjusted and GAAP and these are just three examples out of dozens more.

There is no question that these are one time and non-cash charges. But the wide gap between adjusted and GAAP earnings this earnings season is nevertheless an unflattering comment on the ‘quality’ of the earnings performance.  

Fourth, is the unusually positive revisions trend for the current and following quarters. This is a sight that we haven’t seen in a very long time; definitely not over the last 6 years.

The most important factor driving this positive revisions trend is the tax cuts. The rise in oil prices and the impact of uptrend bond yields on banks’ profitability are some of the other factors.

Estimates have gone up across the board for 15 of the 16 Zacks sectors, with the Conglomerates sector as the only to have suffered modest negative revisions, primarily a reflection of the never-ending General Electric (GE - Free Report) saga. Estimates have gone up the most, in dollar terms, at the Finance sector, followed by Energy, Technology, Medical and the others.

Expectations Beyond Q4

Stepping back from the quarterly picture and looking at the growth trajectory on an annual basis, earnings growth resumed 2017 after flat-lining in the preceding two years, with total S&P 500 earnings on track to increase +7.5% in 2017 on +5.0% higher revenues.

But the growth pace is expected to accelerate meaningfully in 2018, with the growth pace steadily going up in recent weeks to reflect the impact of tax law changes.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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