- First quarter earnings results fell a bit short of the annual pace that we proposed at the beginning of the year.
- Corporate revenues did not track forecasts due to challenging weather, price increases remaining at the low end and subdued cyclical activity and investment spending.
- We should probably adjust full year estimates down a bit, but not by much.
Tom West, Director of Equity Research | May 19, 2014
The first quarter reporting season has wound down for those companies with “normal” reporting calendars, i.e. those with March quarter ends. Much of the retail sector is on a shifted calendar and is just now reporting. If you compare the results so far to the “earnings walk” laid out at the beginning of the year, you would likely come to conclusion that first quarter results, broadly speaking, fell a bit short of the annual pace that was proposed:
First quarter earnings of the S&P 500 look set to post about 5.7% growth. And corporate revenues did not track the 5.5% shown above. A couple factors were at work here: Challenging weather in much of the country halted activity throughout the supply chain, price increases (inflation) remain at the low end and cyclical activity and investment spending remain subdued. On the margin, management teams were positive on overseas markets.
While the industrial sector did not post impressive results, positive commentary on orders and end market activity made one feel better about an uptick that is “shimmering” in the quarters to come. Consumer discretionary did well as a sector, with revenue growth of about 4%, which probably outperformed nominal wage growth by a half a point or so. As we have seen for a while, durables did a bit better than non-durables. Consumer staples names did the best they could with scarce growth, leaning on buybacks to supplement growth.
The financial sector was challenged by a couple factors. Mortgage activity at some major intuitions was considerably lower than the brisk pace set in the first quarter of last year. And among the big capital markets players, lower trading activity in fixed income, commodities and currency remains a challenge.
In sum, it is likely that that any of the business to be recovered as a result of Q1 weather were probably recovered by the end of the quarter. So whatever we lost, we won’t get back, and we should probably adjust full year estimates down a bit. But not by much. In our view, the greatest risk to the “7% solution” above is probably in the revenue growth line, but we do expect just enough acceleration to warrant leaving the 2014 earnings walk as is.
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