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Strong Earnings Season Validates Current High Share Prices

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Dan Greenhaus of BTIG Research published a report today focusing on a wrap up of the fourth quarter 2013 earnings season. He points out that nearly all of the S&P 500 (INDEXSP:.INX) have reported now, and the share weighted change in EPS across the board is just above 9%. The report also highlights that around 66% of reporting companies beat consensus EPS estimates. This figure is pretty much in sync with the historical average.

Share buybacks driving improved earnings

Greenhaus first major point is that a good bit of this quarter’s improvement in earnings comes from companies reducing their float, not increasing sales. “Share count reductions continue to help drive EPS. While EPS growth was in the high single digits, sales growth was in the low single digits. Versus estimates, sales growth was only up 0.8% as staples (household and personal products) and energy missed consensus forecasts.”

Earnings season sales growth

Operating margins

The report also highlighted that operating margins were solid and even still improving in a few sectors. “S&P 500 overall operating margins held steady at roughly 9.6% thanks to the tech sector – with the highest operating margin–which saw margin expansion. However operating margins did come down somewhat for energy, materials, industrials, discretionary staples and health care.”

Weak energy sector

The energy sector was one of the few drags on overall S&P 500 (INDEXSP:.INX) earnings. Energy commodity prices were down, so as as expected, most companies in the sector had a rough quarter. Overall, EPS for energy companies fell by 8 or 9% and sales growth was stagnant. Coal in particular had a poor quarter, and it was only slightly better for the integrateds.

Earnings season S&P 500 revenue

S&P 500 earnings expectation

Lowered forward guidance

Greenhaus notes in concluding that a record number of companies are lowering growth expectations for future earnings. He points out, however, that this trend toward neutral or negative guidance has been going on for several quarters, and reflects both an uncertainty about the macroeconomic situation and an admission that it will be difficult to tighten margins much further.

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