The following is an excerpt from this week's Earnings Trends article. To see the full report, please click here.
Earnings Guidance Remains Weak
Our overall verdict on the Q4 earnings season is that it is no better or worse than what we have been seeing in the last few quarters. In some respects, the Q4 earnings season is an improvement over the recent past. Specifically, total earnings for the S&P 500 are on track to reach a new all-time quarterly record and even earnings growth for the quarter is in on track to be the highest of the year (even after accounting for easy comparisons). Positive surprises started off on the weak side, but even those are running at the best pace of the year.
Revenue growth has been a challenge for companies for quite some time and we don’t see any improvement on that front in Q4 either. If anything, the aggregate revenue growth rate at this stage is even weaker than what we have been seeing in recent quarters, though the bulk of the revenue weakness is due the Finance and Energy sectors.
The most notable thing that hasn’t changed at all from other recent quarters is guidance – it was weak before and it’s still weak, as the guidance from Wal-Mart (WMT), Whole Foods (WFM), Deere & Company (DE), and Boeing (BA), just to name a few, shows. Part of the guidance weakness is likely a function of management’s need for expectations management. The need for conservatism aside, one has to be extremely cynical to believe that management teams would guide lower while knowing that their business outlook was stable, if not improving. The chart below shows how estimates for the current quarter have fallen in response to weak company guidance.
With the Retail sector heavily represented in the still-to-come reports, it is reasonable to expect that estimates still have room to go down.
Companies have been guiding lower quarter after quarter, prompting earnings estimates to keep coming down for almost two years. The market didn’t care much about this, with an ever helpful Fed not letting earnings-related worries coming in the way of the market’s upward thrust. But the Fed has started getting out of the QE business just as these other issues have taken center stage.
The popular narrative connects the Fed Taper with what is happening in the emerging markets. The Fed doesn’t appear in any mood, for obvious reasons, to adjust its Taper plans to accommodate the emerging economies. In fact, it is reasonable to assume that they don’t mind the safe-haven trade keeping bond yields in check.
The 2013 Q4 Scorecard
With respect to the Scorecard for 2013 Q4, we have seen results from 430 S&P 500 members accounting for 91.3% of the index’s total market capitalization. Total earnings for these companies are up +10.4% from the same period last year, with 68.6% beating earnings expectations with a median surprise of +2.4%. Total revenues for these companies are barely in the positive, up only +0.8%, with 59.8% beating revenue expectations with a median surprise of 0.7%.
The +10.4% ‘headline’ total earnings growth rate definitely looks fairly robust, particularly when compared to the growth rate for this same group of 430 companies in the last few quarters. Easy comparisons for three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV) – account for a big part of the strong Q4 earnings growth. Exclude these three and total earnings growth for the S&P 500 companies that have reported drops by almost half. Performance on the revenue front is notably sub-par relative to recent quarters, dragged down by weakness in the Finance and Energy sectors.
The composite picture for Q4 – combining the results for the 430 companies that have reported already with the 70 still to come – is for earnings growth of +9.1%. This will be the highest quarterly growth pace of 2013, with easy comparisons playing a non-trivial role propping up the growth rate. But it’s not all easy comparisons, as total earnings for the index are on track to reach a new all-time quarterly record.
Trends on the estimate revision front have been negative for a while, but we could afford to overlook such details in the Fed-inspired rally. It will be interesting to see if investors will continue to shrug estimate cuts in the post-QE world.
- Total earnings for the 430 S&P 500 companies that have reported results are up +10.4%, with 68.6% beating earnings expectations. Revenues for these companies are up +0.8%, with a revenue ‘beat ratio’ of 59.8%.
- Easy comparisons for Bank of America, Verizon and Travelers account for most of the growth thus far. Excluding these three companies, the earnings growth rate drops to +6.4%, which is comparable to what this same group of companies have achieved in recent quarters.
- Revenue growth at this stage is lower than what we have seen from this same group of companies in Q3 and other recent quarters, dragged down by weak top-line growth numbers from the Energy and Finance sectors. Excluding these two sectors, the revenue growth picture is still weak, but not so starkly.
- Total earnings in Q4 are on track to reach a new all-time quarterly record, surpassing the record reached just the preceding quarter.
- Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +23.2%. Excluding Finance, total earnings growth for the S&P 500 drops to +6.3%.
- Guidance has overwhelmingly been negative in recent quarters and the trend has largely remained in place in the Q4 reporting season as well. As a result, estimates for 2014 Q1 and beyond have been coming down as the earnings season has unfolded.
- The bottom-up ‘EPS’ estimate for the S&P 500 for 2014 currently stands at $117.16, while the top-down estimate for the same is currently at $117.25. For 2015, the bottom-up estimate remains $130.24.
To see the full Earnings Trends PDF, please click here.