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Zacks Earnings Trends Highlights: Citigroup, Caterpillar and General Electric

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For Immediate Release

Chicago, IL – Feb 15, 2018 – Zacks Director of Research Sheraz Mian says, "Total Q4 earnings for the 362 S&P 500 members that have reported results are up +14.5% from the same period last year on +9% higher revenues, with 78.2% beating EPS estimates."

Q4 Earnings Season Scorecard

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 standout features of the Q4 earnings season continue to be very strong revenue momentum, a preponderance of positive surprises and positive revisions to estimates for the current and coming quarters.

•    Total Q4 earnings for the 362 S&P 500 members that have reported results are up +14.5% from the same period last year on +9% higher revenues, with 78.2% beating EPS estimates and 75.4% beating revenue estimates.

•    This is materially better performance relative to what we have been seeing from the same group of companies in other recent periods.

•    For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +13.9% from the same period last year on +8.2% higher revenues. Earnings growth is expected to be positive for 14 of the 16 Zacks sectors, with double-digit growth for the Energy, Technology, Aerospace, Construction, Industrial Products, Basic Materials, Business Services, and Autos sectors.

•    Q4 earnings growth for the Energy sector is the highest of all sectors, with total earnings for the sector up +150.8% from the same period last year on +23.2% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up +11.7%.

•    Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up +22.6% on +10.6% higher revenues. Finance sector earnings are expected to be up +5.2% on +3.8% year-over-year growth in revenues.

•    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 the small-cap S&P 600 index, we now have Q4 results from 42.6% of its members, with earnings up +12.4% on +10.4% higher revenues and the proportion of positive EPS and revenue surprises at 69.9% and 71.9%, respectively. Please check page 30 through 38 of the full report for more details on the small-cap index.

•    Earnings estimates for the current period (2018 Q1) and following quarters have been 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 14 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 +7.3% on +4.1% higher revenues, which would follow +0.7% earnings growth on +3.5% higher revenues in 2016. Index earnings are expected to be up +20.2% in 2018 and +9.6% in 2019.

•    The implied ‘EPS’ for the index, calculated using index 2018 P/E of 18.3X and aggregate index close, as of February 13th, is $145.40. Using the same methodology, the index ‘EPS’ works out to $159.30 for 2019 and $122 for 2017.

Q4 Scorecard (as of February 14, 2018)

We now have Q4 results from 362 S&P 500 members that combined account for 82.3% of the index’s total market capitalization. Total earnings for these 362 index members are up +14.5% from the same period last year on +9% higher revenues, with 78.2% beating EPS estimates and 75.4% beating revenue estimates.

The Q4 earnings and revenue growth pace for these 362 companies is notably tracking above what we had seen from the same group of companies in other recent periods. The proportion of positive EPS and revenue surprises is similarly significantly above other recent periods for this group of index members.

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 help 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 13% higher than GAAP earnings for the 362 index members that have reported results already, but they are an extremely high 44% 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. Caterpillar’s (CAT - Free Report) adjusted earnings for the quarter of $1.29 billion compare to its GAAP loss of $1.3 billion. While adjusted earnings for the 362 S&P 500 members are up +14.5% from the same period last year, while the same growth on a GAAP basis represents a decline of -9.2%.

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 14 of the 16 Zacks sectors, with the Conglomerates sector as the only one 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 Technology, Energy, Medical and the others.

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 Trendsand 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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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.

If you want an email notification each time Sheraz Mian publishes a new article, please click here>>>

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