Halftime Report for Q4 Earnings Season
With results from more than half of the S&P 500 (.INC) members already known, we are in a good enough position to pass judgment on this reporting season. This week’s busy reporting docket, with almost 500 companies (including 93 S&P 500 members) coming out with Q4 results, is unlikely to change this initial assessment by much.
While investors seem to be a bit more critical than other recent earnings cycles, the Q4 earnings season doesn’t appear to us to be no worse than what we saw over the last few quarters. In fact, this earnings season is turning out to be better than recent quarters in terms of earnings growth and positive earnings surprises. Where it’s no different from other recent quarters is in terms of lackluster top-line growth and continued negative guidance.
It appears that investors were looking for something better, particularly on the guidance front. The hope was that given the improving domestic economic scene and signs of stabilization in Europe, we will get relatively reassuring guidance from management teams. But we are not seeing that, with managements continuing to provide sub-par outlook for the coming quarter(s).
In other words, management teams are dishing out what they have been doing for more than a year now. And this is prompting estimates for the current quarter to come down, as the chart below shows.
Q3 Earnings Scorecard (as of Friday, 1/31/2013)
Total earnings for the 251 S&P 500 members that have reported already, combined accounting for 66.4% of the index’s total market capitalization, are up + 11.4% from the same period last year, with a ‘beat ratio’ of 70.1% and a median surprise of +2.57%. Total revenues are up +1.6%, with a revenue ‘beat ratio’ of 59.4% and a median surprise of +0.96%.
More companies have beat earnings and revenue expectations than has been the case in recent quarters, as the chart below shows. Perhaps expectations had fallen a bit low ahead of the Q4 reporting season.
The earnings growth rate for these 251 companies is better than what we saw from this same group of companies in Q3 and the 4-quarer average, while the revenue growth rate is not much different from recent norm, as the chart below shows.
But a big contributor to the strong Q4 growth is easy comparisons for just three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV). Exclude these three companies and total earnings growth for the S&P 500 companies that have reported drops to +5.9% from the ‘headline’ +11.4%, which is about where growth has been in recent quarters.
The Composite Growth Picture
The ‘composite’ picture for Q4, where we combine results from the 251 companies that have reported already with the 249 still to come, is for growth rate of +9.6%. This will be the highest quarterly growth pace of 2013, with easy comparisons playing a non-trivial role in propping up the growth pace. The +9.6% growth rate compares to +5.1% in Q3 and +4% in Q2.
Finance remains a big growth driver in Q4 – total earnings growth for the S&P 500 in Q4 drop to +6.5% once the sector is excluded. Energy continues to be a drag on aggregate growth, with total earnings for the sector expected to be down -8.9% in Q4 after declining -8.4% in Q3. Excluding the Energy sector, total Q4 earnings for the S&P 500 would be up +12.3% vs. +7.1% in Q3.
Technology earnings are expected be up +6.0% after the +5.9% gain in Q3. While Google (GOOG) andFacebook (FB) did extremely well, the sector overall has had a fairly good earnings season as well. With Q4 results from 84.5% of the sector’s total market capitalization already out, total earnings for the sector are up +6.5% on +5.6% higher revenues. These growth rates aren’t materially different from what we saw from this same group of companies in Q3, but the beat ratios represent a notable improvement.
Of the Tech sector companies that have reported already (45 out of 65 Tech sector companies in the S&P 500 accounting for 84.5% of the sector’s total market cap have reported results), 84.4% have beat earnings expectations, up from Q3’s 68.9% earnings beat ratio and the 4-quarter average of 74.4%. Positive revenue surprises have been materially widespread relative to recent quarters as well, with Q4 revenue beat ratio currently tracking 73.3% vs. 57.8% in Q3 and the 4-quarter average of 55.6%.
Lack of corporate capital spending has been an issue for the sector for some time and the consensus view is that we will see a turnaround on that front later this year. We haven’t heard anything yet that will add to our confidence in that expectation. But this optimistic view is a big contributor to the expected upturn in the Tech sector’s growth estimate later this year. Total earnings for the sector are expected to be up +9.5% this year and +10.4% in 2015, pronounced acceleration from the flat reading in 2013.
Guidance Still on the Weak Side
For obvious reasons, the market’s focus has been on management guidance for 2014. Companies typically provide guidance only for the following quarter, but they do tend to discuss their outlook for the coming year on the Q4 earnings calls.
While about half of the results are still to come, what we have seen thus far on the guidance front doesn’t show any improvement from what we have been seeing quarter after quarter for almost two years now. Despite the improving domestic economic backdrop and the stabilized European environment, companies are still predominantly guiding lower. The ongoing emerging market turmoil is only adding to this lack of visibility. We have seen this start to show up in negative estimate revisions for Q1 and beyond, as earlier referred to. But estimates will likely have come down more if current trends persist.
- We will get the January manufacturing ISM survey after the market opens, with expectations of a modest pullback from December’s 56.5 level.
- Yum Brands (YUM) is the most notable company reporting today after the close.
- We will get the December Factory Orders report, with expectations of -1.9% decline after November’s +1.8% gain.
- Eaton Corp (ETN), International Paper (IP) and Michael Kors (KORS) are the notable reports in the morning, while Hain Celestial (HAIN) will report after the close.
- Zacks Earnings ESP or Expected Earnings Surprise, our proprietary leading indicator of earnings surprises, is showing Eaton Corp and Michael Kors coming out with earnings beats.
- Stocks with positive Earnings ESP and Zacks Rank of 1, 2 or 3 are highly likely to come out with positive earnings surprises. Eaton has a Zacks Rank #2 (Buy) and Earnings ESP of +1.9%, while Michael Kors has a Zacks Rank # 3 (Hold) and Earnings ESP of +1.2%.
- To get a better understanding of Zacks Earnings Surprise Predictor, please click here.
- We will get the January private sector jobs tally from ADP. Also on the docket is the sector ISM survey.
- Time Warner (TWX) and Ralph Lauren (RL) are the key reports in the morning, while Disney (DIS) and Twitter (TWTR) will report after the close.
- Earnings ESP is showing Twitter and Time Warner coming out with positive earnings