The following is an excerpt from this week's Earnings Trends article. To see the full article, please click here.
Closing the Books on Q1 Earnings Season
The weak Q1 earnings season is coming to an end, with attention slowly shifting in the coming days to the next reporting cycle. What we saw this earnings season was anemic growth and continuation of the negative guidance that has become a recurring theme quarter after quarter for more than a year now.
This didn’t come as a surprise, as earnings growth has been hard to come by for some time and Q1’s unique issues only added to those pre-existing challenges. Weather became a recurring theme in everything related to Q1. The U.S. economy’s growth numbers for the quarter provided a good context for the earnings performance of Wal-Mart (WMT), FedEx (FDX) and many others in Q1. With respect to the economy, however, more recent economic data is pointing towards improved growth momentum from Q2 onwards, even though the pathway to the more aggressively optimistic GDP growth estimates is unclear at this stage.
We are not seeing anything comparable on the earnings front, with estimates for the current period starting to follow the trend that has been in place for almost two years now – they are going down. This is a trend that has been in place for almost two years now, with the pace expected to accelerate further in the coming days.
Chart below shows how earnings estimates for Q2 have evolved in recent weeks.
Q1 Scorecard (as of June 22nd, 2014)
We now have Q1 results from 497 S&P 500 members that combined account for 98.8% of the index’s total market capitalization. Total earnings for these 497 companies are up +1.2% from the same period last year on +2.6% revenues, with 64.8% beating EPS estimates and 49.7% coming out with positive revenue surprises.
The two sets of charts below – the first comparing total earnings growth for these 497 companies with what these same companies reported in 2013 Q4 and the 4-quarter average and the second comparing the beat ratios – compare the results thus far with other recent quarters.
Q1 Growth Compared
Q1 Beat Ratios Compared
The EPS beat ratio is tracking better relative to recent quarterly averages, likely reflecting the low levels to which estimates had fallen ahead of the start of the Q1 earnings season. The revenue beat ratio started out on the weak side, but has caught on with historical averages.
We should keep in mind, however, that the primary reason for the sub-par aggregate growth rate is the drag from the Finance sector. The Finance sector results didn’t have much growth this quarter after many quarters of strong momentum, but the sector’s results were notably dragged down by weak results from Bank of America (BAC). Excluding Bank of America from the Finance sector, total earnings for the sector would be only -2.24% (vs. down -7.2% otherwise). And excluding Bank of America from the S&P 500 as whole would push up the aggregate growth rate to +2.3%.
Excluding the Finance sector as a whole, total earnings for the S&P 500 companies that have reported results would be up +3.4% on +3.2% higher revenues, which is actually better than what we have seen from the same group of ex-Finance companies in other recent quarters.
- The Q1 earnings season has ended for 13 of the 16 Zacks sectors. Total earnings for the 497 S&P 500 companies that have reported results are up 1.2%, with 64.8% beating earnings expectations. Revenues for these companies are up 2.6%, with a revenue ‘beat ratio’ of 49.7%.
- The performance from these companies, particularly earnings, is weaker than what we have seen from this same group of companies in recent quarters, with Finance as the major drag.
- Results from the Retail sector have been very weak. Total earnings for the 98.4% of the sector’s total market capitalization that have reported results already are flat +0.0% on +3.3% higher revenues. Earnings surprises were predominantly negative for retailers, with only 40.5% of the companies beating earnings estimates, the lowest in the S&P 500. It wasn’t all weather, as most of them guided lower for the current and coming quarters as well.
- The Finance sector shifted gear this quarter, becoming a drag on aggregate growth after being a growth driver for many quarters. Bank of America is a big reason for the sector’s weak growth this quarter, but the sector’s total earnings growth would be weak relative to other recent quarters even after excluding Bank of America from the numbers. Finance sector stocks have underperformed the S&P 500 index in price action as well, with the average Finance sector stock up +5.8% year to date vs. +6.7% gain for the index as a whole.
- Excluding the Finance sector, total earnings for the rest of S&P 500 companies that have reported Q1 results would be up +3.4% on +3.2% higher revenues and modestly higher margins. This is actually modestly better than the growth performance we have been seeing from this ex-Finance cohort in recent quarters as well. Gilead’s (GILD) strong results and its impact on the Medical sector has materially helped this ex-Finance growth picture.
- Apple (AAPL) and Facebook (FB) had strong Q1 results, though overall results for the Technology sector are not materially better than what we had seen in the preceding quarter. Total earnings for the 93.8% of the sector’s total market capitalization that have reported results are up +4.4% on +2.7% higher revenues, with 61.9% of the companies beating EPS expectations and 58.7% beating revenue estimates.
- The Utilities sector has been the best performer in the S&P 500 year to date in terms of stock price performance – up +11.5% vs. a gain of +6.7% for the index as whole. The sector has also been a strong performer on the earnings front in Q1, with total earnings for sector up +18.0% on +11.2% higher revenues and 73.5% of the companies beating EPS estimates and 82.4% coming ahead of revenue estimates.
- The composite Q1 picture for the S&P 500, combining the actual results from the 497 companies with estimates for the 3 still to come, is for earnings to be up +1.3% from the same period last year, on +2.7% higher revenues on essentially flat margins. Sequentially, total earnings for the S&P 500 are expected to be down -3.6%, with the overall level of total earnings for the index the lowest in a year.
- The consensus expectation is for the Q1 earnings season to be the low point of this year’s earnings picture, both in terms of total earnings as well as the growth rate. Total quarterly earnings reached an all-time record in 2013 Q4, but are expected to fall short of that level in 2014 Q1. Expectations for the coming quarters reflect a strong ramp up, with each of the following three quarters a new all-time record.
- Guidance has overwhelmingly been negative in recent quarters and we saw the same trend in place with the Q1 reports as well. The weak outlook from Wal-Mart (WMT) and Target (TGT) is just the latest in a long line of companies guiding lower for the current and coming quarters.
- Total earnings in Q2 are currently expected to be up +3.2% (down from +5.5% in early April), followed by growth rates of +6.1% in Q3 and +10.5% in Q4. For the full year, total earnings are expected to be up +7.0% in 2014 and +11.5% in 2015.
- The bottom-up ‘EPS’ estimate for the S&P 500 for 2014 currently stands at $112.13, while the top-down estimate for the year is currently at $117. For 2015, the bottom-up estimate remains at $125.29, with the top-down estimate from Wall Street strategists remains at $125.
To see the full Earnings Trends report, please click here.