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Tickers in this Article: CMCSA, CHTR, TWC
Thursday, February 13, 2014

The market has reversed a big part of this year’s losses, but it may be premature to raise the all-clear flag. Futures were modestly in the red even before this morning’s soft retail sales and jobless claims readings. Weather has literally muddied the economic waters, making it difficult to get a clear read on the nation’s economic picture.

The retail sales ‘miss’ will likely get chalked up weather as well. But also in the headlines today is the major deal announcement in the cable industry, with Comcast (CMCSA) acquiring Time Warner Cable (TWC) in an all-stock deal valued. Time Warner Cable has been in the news as an acquisition target for some time, with Charter Communications (CHTR) as the most talked about acquirer. John Malone, the cable industry pioneer who had acquired a 27% stake in Charter, was behind that company’s bid for Time Warner. Time Warner had rejected Charter’s three offers as too low. In addition pricing issue, Timer Warner was reportedly concerned about the amount of debt that Charter would have to incur to the close the transaction. The deal is almost guaranteed to face tough regulatory scrutiny on competitive given Comcast’s status as the nation’s largest cable operator and the owner of NBC Universal.

The Q4 earnings season scorecard as of this morning shows results from 382 S&P 500 members that combined account for 84.4% of the index’s total market capitalization. Total earnings for these companies are up +10.7% from the same period last year, with 69.6% coming ahead of consensus EPS estimates. Total revenues are up only +0.7%, with 63.1% have beat revenue expectations.

This is better performance than what we have seen from this same group of companies in recent quarters, though revenue growth is on the weak side. The revenue weakness is mostly due to the Finance and Energy sectors, with a one-off tough comparison for Prudential Financial (PRU) as a big reason. Excluding the drag from these two sectors, the revenue growth rate is still on the weak side relative to recent quarters, but less so compared to the ‘headline’ +0.7% gain.

This has been overall an ‘ok’ earnings season, no better or worse than other recent quarterly reporting cycles. Companies have beat earnings and revenue estimates at an above-average rate, but they continue to guide lower, prompting estimates for the current quarter to come down. This negative revisions trend has been an ongoing issue for more than a year now, but investors generally didn’t show much concern about it.

In the current changed macro backdrop of post-QE Fed and economic worries, investors may not be able to overlook this underwhelming outlook. Today's retail sales 'miss' may be due to weather related issues, but it does show that the economic outlook is far from clear.

Sheraz Mian
Director of Research

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