Citi Raises S&P 500 EPS Guidance While Noting Short Term Headwinds

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Tobias M Levkovich of Citi thinks the stock market is slightly undervalued.

Writing in a research note from last week, Citi slightly raised their earnings forecast from $117.25 to $117.50, slightly ahead of consensus.  Noting “a variety of issues have conspired to restrain 1Q14 economic and thereby earnings growth,” the report cited a familiar excuse, the weather, among other items, including “a stronger US dollar relative to the Canadian dollar and the Mexican peso (affecting the country’s largest trading partners).”  As a result, Citi’s lowered its near term earnings estimates while raising the longer term view.

Citi ups long term estimates, cuts short term

Considering other estimates, the report found it interesting that consensus earnings per share estimates for 2014 growth had slipped from double digits to high single digits, the report said, noting that weather played a role along with weaker emerging economies.  “We suspect currency and tougher conditions in some large financial companies also affected last quarter’s earnings prospects.”

The report expected to see corporate effective tax rates rising “as accelerated depreciation benefits have expired and more income is earned domestically which will be subject to higher statutory rates than overseas profits that have not been repatriated,” while at the same time a degree of tax loss carry forwards may have ended, the report said.

Citi notes short term headwinds as stocks sag

As the stock market took a dive on Friday and continued to head lower today, Citi noted in Friday’s report that quarterly pre-announcements, which are being watched more closely than in previous quarters, are coming in negative indicating short term headwinds.

Citi was again positive on the longer term outlook when balancing short term issues. The weather related weaker numbers in the first quarter should experience recover in the second quarter and then pick up steam, the report says. “In addition, corporate interest expense should not bounce higher that quickly due to strong cash flow and still tight financing spreads.“

The Citi report also noted that some positive factors not considered in their analysis might come into play, including the possibility of a lift from lower pension funding expense in 2014, the report noted. “While we do not yet have 2013 pension funding data across the S&P 500 funding levels, we suspect that companies have seen a significant improvement in closing the funding gap just as a result of higher bond yields shrinking the present value of the future liabilities.”

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