Post-Fed, but Pre-Earnings - Earnings Preview
21 Juni 2013 - 11:36AM
Zacks
The market was looking for clarity from the Fed about the future of
the QE program. But it didn’t like the surprisingly explicit
timeline from Chairman Bernanke, and has been in a somewhat
downbeat mood ever since.
The after-effects of the Bernanke announcement and the resultant
impact on benchmark interest rates will no doubt remain the big
issues for the market this week as well, but we are also getting
close to the start of the Q2 earnings season. In fact, the Q2
earnings season actually got underway last week with the earning
releases from
FedEx (FDX),
Oracle
(ORCL),
Adobe (ADBE),
Darden
(DRI) and others.
It hasn’t been a very inspiring start thus far, but all of these
companies have been grappling with lingering issues affecting their
businesses for awhile and their Q2 reports didn’t indicate that
they had finally turned the corner. We will see if this week’s
reports from the likes of
Walgreen (WAG),
ConAgra (CAG), Lennar (LEN),
Paychex (PAYX) and others will show a more
promising side of the earnings picture. But we will likely have to
wait a bit longer for the reporting season to get really high gear
--
Alcoa’s (AA) report is coming on July 8th.
As has become customary at the start of recent quarterly earnings
cycles, expectations for the Q2 earnings season remain quite low. A
major driver of these low expectations is company guidance during
the Q1 earnings season, which was overwhelmingly on the negative
side. Total earnings for companies in the S&P 500 are expected
to be up only +0.5% from the same period last year.
This is sharply down from +3.9% growth expected in the quarter
in early April. Total earnings were up +2.3% in Q1, but growth was
expected to be in negative territory at this stage before that
reporting season.
Finance wasn’t a big driver of aggregate earnings growth for the
S&P 500 in Q1, but takes back the lead role in Q2, with total
earnings for the sector expected to be up +19.6% and estimates for
the group are steadily going up. Earnings for the sector were up
+7.7% in Q1, which came after many quarters of double-digit
growth.
All the industries within the Finance sector -- major banks,
regional banks, brokers and insurers -- are expected to have
positive growth. But the growth picture is particularly notable for
the brokerage and investment management industry players like
Goldman Sachs (GS) and Morgan
Stanley (MS), with total earnings for the group expected
to be up +39.6% in Q2 after the +2.6% gain in Q1.
Unlike Finance, the earnings picture for the Technology sector
remains fairly weak. Total earnings for the sector are expected to
be down -8.7% from the same period last year, which follows the
-3.8% earnings decline in Q1. Earnings estimates for the sector
have been steadily coming down over recent weeks, with the current
-8.7% decline down from expected decline of -3.1% in mid-April.
The weakest group within the Technology sector is the PC makers,
with total earnings for the Computers and Office Equipment industry
expected to be down -16.1% in Q2 after the -14.1% decline in Q1.
Semiconductors and electronics are other Tech industries with
negative earnings growth in the quarter.
Expectations for full-years 2013 and 2014 have come down far less
than what we have seen for Q2 estimates. In fact, it is reasonable
to assume that given the improving outlook for the Finance sector,
aggregate estimates will start rising after a very long time in the
coming weeks.
The +6.1% growth in total earnings this year, down from +6.8% in
early April, reflects a material ramp up in the second half of the
year that is then expected to carry into 2014. Combining the actual
results for Q1 with estimates for Q2 gives us +1.5% year-over-year
growth in total earnings in the first half of 2013. But total
earnings are expected to be up +9.4% in the second half of the year
and a further +11.5% in full-year 2014.
Total earnings for companies in the S&P 500 in Q2 are expected
to remain to below Q1’s record level. By our calculation, aggregate
bottom-up earnings in Q2 will total $246.8 billion, compared to
$245.6 billion in 2012 Q2 and 2013 Q1’s record of $253.9 billion.
The Finance sector will generate $49 billion or 19.8% of the
S&P 500’s total Q2 earnings, while the Tech sector is expected
to generate $41.5 billion or 16.7% of the index’s total
earnings.
Finance is reclaiming its dominant earnings position in the
index which was taken over by the Tech sector following the 2008
crash. Tech remained the biggest earnings producer for the S&P
500 from 2008 through 2012, but the leadership role moves back to
Finance this year. Finance is on track to produce $198.5 billion in
2013 (19.3% of the total), up from $173.6 billion in 2012 (17.9% of
the total), while Tech is expected to produce $183.1 billion this
year (17.8% of the total), up from $182.9 billion in 2012 (18.9% of
the total).
Trends in Estimate Revisions
The revisions trend appears to have lost some ground in the last
few weeks, though the overall trend still remains in the
positive-to-neutral territory, as the charts below show. The key
metric in all the charts is the ‘revisions ratio,’ which is the
ratio of total number of upward revisions over the preceding four
weeks to the total number of revisions (positive and negative) over
that same period.
We have two charts each for 2013 and 2014. The bar charts show the
current state of the ‘revisions ratio’ (as of 6/14/13), while the
line charts plot the ratio’s trajectory over the preceding 24
months.
![](http://staticzacks.net/images/zacks/blogs/1371849647_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371849662_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371849677_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371849694_scaled_425.jpg)
The ratio doesn’t tell you the ‘magnitude’ of the revisions,
only the direction. The ‘50%’ level (the dark line) is the dividing
line between positive and negative trends, with readings above 50%
implying more positive than negative revisions. That said, our
analysis shows that readings between 45% and 55% don’t offer
material insights into the magnitude of revisions. It is only
readings above 55% and below 45% that offer bullish and bearish
signals about the magnitude of earnings revisions.
As you can see in the charts above, the revisions trend for the
S&P 500 as a whole is still in neutral territory, the current
level (49% for 2013) is down from three weeks back (56% at the end
of May). Finance has been in bullish trend for weeks now, but the
estimate revisions trend for the Tech sector also seems to be
moving in that direction now.
Hard to tell how sustainable the trend will prove to be, but the
sector’s revisions ratio for 2013 currently (as of 6/14) stands at
59.6%, the highest level in over 12 months. Some of the stand-out
revisions in the sector were industry players like Motorola
Solutions (MSI), Advanced Micro Devices
(AMD) and NetApp (NTAP).
Finance continues to be in bullish territory for both this year and
next (the blue line). The sector’s revisions ratio currently (as of
6/14) stands at 72% for 2013 and 74% for 2014, signaling good times
ahead for the sector. The trend makes perfect sense as higher
interest rates may be a hindrance for other industries, but it’s
beneficial for the Finance sector’s earnings.
Flat net-interest margins have been a permanent feature of the
sector’s, particularly banking’s, earnings picture in recent
quarters. The Finance sector’s positive earnings outlook is a
function of the rising trend in interest rates.
On the negative side, the revisions trend is decidedly in bearish
territory for Industrials and Basic Materials both for this year
and next. Peabody Energy (BTU), U.S.
Steel (X), Joy Global (JOY),
Freeport-McMoran (FCX) have all suffered
significant negative estimate revisions lately.
Fed aside, we have a bunch of housing related data on deck this
week, including Housing Starts and Existing Home Sales data. We
will also have the Empire State and Philly Fed regional
manufacturing surveys and the May CPI numbers this week. But
everyone will be looking ahead to the Bernanke press conference on
Wednesday afternoon.
ALCOA INC (AA): Free Stock Analysis Report
ADOBE SYSTEMS (ADBE): Free Stock Analysis Report
ADV MICRO DEV (AMD): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis Report
CONAGRA FOODS (CAG): Free Stock Analysis Report
DARDEN RESTRNT (DRI): Free Stock Analysis Report
FREEPT MC COP-B (FCX): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JOY GLOBAL INC (JOY): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
MOTOROLA SOLUTN (MSI): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
PAYCHEX INC (PAYX): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
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