Q4 2015 Earnings Season Review – The Corporate Revenue Recession Deepens by Estimize
The fourth quarter earnings season for S&P 500 companies is officially wrapping up. The season started out on a sour note in January, with turbulent US markets, currency headwinds, plunging oil prices and a weakening Chinese economy all plaguing the large cap companies, and things only got worse from there.
Year-over-year profit growth for the S&P 500 stayed negative throughout the quarter, closing out at -1.8%, with even lower revenue growth of -3.5%. Both of these numbers fell significantly from what was expected at the beginning of the season, with analysts initially calling for negative earnings per share (EPS) growth of -1.4% and revenues of -2.2%. Just taking a look at the beat rates gives us some clues, with only 55% of companies able to beat the Estimize consensus, and an even steeper 41% beating on revenues. Both of these are far lower than historical averages.
Much has been made over the last year of an impending “earnings recession,” ie: three consecutive quarters of YoY profit declines for the S&P 500. However, we haven’t seen a down quarter for EPS since 2009, just barely seeking out of the red last quarter with 0.6% growth. Revenues on the other hand are heading for their fourth consecutive quarter of negative growth, meaning sales growth was technically in recession territory at the completion of Q3 2015. Companies continue to manipulate EPS numbers, but don’t have that same ability on the sales front. It’s a trend that we’ve seen since Q3 2012, meager revenue growth in the low single digits or worse, and it’s certainly cause for concern.
Sector leaders and laggards held fairly steady throughout the reporting season, with Health Care and Consumer Discretionary claiming the top spots, and Information Technology creeping up to third place. On the opposite end, Energy and Materials remain the biggest laggards.
For Health Care, profit growth was recorded at 7.6%, with even higher revenue growth of 8.7%. These numbers crept up during the season on the heels of better-than-expected results. Leading the sector once again was biotechnology, with earnings increasing 19.6% from the year-ago quarter. This high growth industry has seen large capital inflows, and lots of of M&A activity in the past year. The darling of the space, Gilead Sciences, led the pack when they massively beat expectations and continued their multi-quarter trend of double-digit growth on the top and bottom-line.
Consumer discretionary started out the season at the top of the leaderboard, then slipped to third place at the halfway mark, finally recovery slightly with some strong retail reports. Earnings per share growth looks like it will settle at 6.2% for the sector, with revenue growth lagging slightly at 4.9%. The fourth quarter tends to be the strongest for consumer discretionary due to the inclusion of the holiday season. Considering the National Retail Federation said holiday shopping was at one of its slowest paces in years, the sector as a whole did pretty well.
As oil prices began to dip towards the end of 2014, many analysts anticipated consumers would pass on savings through to the retailers. Instead, many consumers have taken lower prices at the pump as an opportunity to save money after years of not having that ability. They are also allocating discretionary income to other places outside of traditional retail, such as tech and health care. The industry winners within this sector continue to be internet retail, household durables and automobiles. The latter two point to a newer trend that emerged in 2015, where consumers were confident enough in their financial position to start making large ticket purchases again. This lead to an increase in the sales of homes, cars and appliances.
The Information Technology sector was initially expected to post meager earnings growth of 3% for the quarter, but with great results out of the internet software & services industry in particular, EPS growth has increased to 5.0%. Most of that upside can be attributed to incredible results out of Facebook and Google, massively beating both earnings and revenue expectations from Estimize, while also recording stellar year-over-year growth of 20%+ for each metric. This was Facebook’s highest sales growth figure in 5 quarters, an impressive feat for a company with a market cap of $310B.
As mentioned, the laggards this season are not so surprisingly Energy and Materials. The weakening Chinese economy continues to have a crushing impact on commodities, as it is the largest importer worldwide. Comps for these two sectors continue to dip lower as a result. At present, EPS estimates for the Energy sector stand at a whopping YoY decline of 70%, with revenue expectations down 34%. Just when analysts thought the freefall in oil prices was slowing, Brent Crude dropped an additional 30% in Q4.
Meanwhile, Materials worsened to -17% and -18%, for earnings and revenues, respectively. The main culprit here is of course the metals & mining industry due to a slowing global economy and cratering demand out of China.
This officially closes out the fourth quarter as the worst earnings season since Q3 2009. And it doesn’t look like things are going to improve in the first quarter of the new year. Expectations for EPS currently stand at -3.2%, with a slight improvement in revenues which are currently expected to come in flat. We will start getting those results later this month.