Summary
Expectations for the second quarter 2012 earnings season are coming
down as the early reporting companies highlight global growth
concerns. A number of the 26 companies that have already reported
results -- and many of those that have pre-announced -- have been
pointing towards the slowdown in China and problems in Europe.
It is perhaps too early to draw any firm conclusions from the small
sample of companies at our disposal. But it would make sense for
the earnings picture to deteriorate given the tough macro-backdrop
all over the world. There is hardly any place in the world at
present that can be described as in good economic shape. Europe is
in recession; China, India and Brazil are slowing down; and the
outlook for the U.S. economy does not look that favorable, either.
The combination of these macro headwinds is showing up in
down-trending earnings forecasts, with current expectations for
second-quarter earnings to be up only 0.6%. This is down from
growth expectation of 2.3% at the end of May and close to 5% in
mid-April. Excluding Finance, this modest growth turns to a 5%
decline.
Key Points
-
The second-quarter 2012 reporting season will
'unofficially' get underway next week with
Alcoa's
(
AA
) results, though 'officially' earnings season started last
month, and we have results in hand from 26 S&P 500
companies already.
-
These early reports do not paint a very inspiring picture
of second quarter earnings season. Not only do the growth
numbers for these companies compare unfavorably to the prior
quarter, but the tone of management guidance has also been
underwhelming.
-
On the earnings calls and pre-announcements, we are
starting to hear a lot more about global growth uncertainties
than was the case last quarter. We saw this with the earnings
results from
FedEx
(
FDX
) and
Nike
(
NKE
) and pre-announcements from operators like
Procter & Gamble
(
PG
),
Ford
(
F
) and others.
-
Expectations for the 95% of companies still to report
results continue to come down, with total earnings
expected to increase 0.6% from the same period last year. This
growth expectation is down from 2.3% at the end of May and
close to 5% as the first quarter reporting season was getting
into high gear in early April. This growth expectation reflects
a 0.3% drop in revenue and an 8-basis point expansion in net
margins.
-
The Finance sector accounts for most of the
second-quarter growth, with earnings in the sector expected to
be up 38.1% in the quarter despite the massive trading hit to
J.P. Morgan's
(
JPM
) earnings. Excluding Finance, total earnings in the second
quarter of 2012 will be down 5% from the same period last
year.
-
Tech earnings are expected to increase by only 2.04% in the
second quarter -- a sharp deceleration from the persistent
double-digit quarterly growth trend of recent quarters. This
compares to growth of 13.6% in the first quarter. Excluding
Apple
(
AAPL
), Tech earnings are expected to be down 4.2% in the second
quarter. Tech revenue is expected to up 5.3% in the second
quarter, after a 10.5% gain in the first quarter. Excluding
Apple, Tech revenues are expected to be up 2% in the second
quarter following a 5% gain in the first quarter.
-
Full-year earnings for companies in the S&P 500 are
expected to total $970.6 billion in 2012 and approximately $1.1
trillion in 2013, representing growth rates of 8.9% and 10.7%
for 2012 and 2013, respectively. The current growth
expectations for this year and next are down from 9.4% and
12.7% in early April. Total earnings were up 15.2% in 2011 and
44.9% in 2010.
-
Nine of the sixteen Zacks sectors will have double-digit
earnings growth in 2012, with Finance expected to grow 24.9%,
Tech 13.7% and Construction 53.7%. The weakest sectors are
Utilities (down 6.5%) and Energy (down 3.5%).
-
Total revenues are expected to increase 3.2% in 2012 and
4.5% in 2013, after gains of 9% and 8.1% in 2011 and 2010,
respectively. Construction is the only sector with double-digit
revenue growth this year, with Industrial Products and Medical
in the high single digits.
-
The best of the margin expansion trend is now firmly behind
us, with second quarter margins expected to be down by 19 basis
points sequentially. However, margins are expected to expand by
an additional 8 basis points in the second quarter from the
same quarter last year. Keep in mind, however, that only 7 of
the 16 Zacks sectors will have positive year-over-year margin
comparisons, with Finance as the biggest positive driver.
Excluding Finance, the year-over-year margin comparison turns
negative.
-
For full-year 2012, margins are expected to increase 39
basis points, with Finance as the biggest contributor to the
expansion and five sectors experiencing contracting margins.
Excluding Finance, margins would be up a much more modest 12
basis points this year.
-
The bottom-up 'EPS' estimates for 2012 and 2013 --
reflecting projections of analysts at brokerage firms covering
individual companies -- currently stand at $102.57 and $113.50,
respectively. The top-down estimate for 2012 and 2013 --
reflecting the projections of strategists at brokerage firms --
currently stand at $102.87 and $109.88 for 2012 and 2013,
respectively. As you can see, the macro analysts are more
bearish in their outlook than the micro analysts.
Expectations Still Coming Down
The financial media associates the start of each quarterly earnings
season with the release of Alcoa's results, but the reporting cycle
always gets underway weeks earlier. Same is the case with the
second quarter, with results from 26 companies in the S&P 500
already out.
Total earnings for these companies are up 2% from the same period
last year, with a median surprise of 1.5% and only 54% beating
expectations. This is a far cry what these same companies achieved
in the first quarter of 2012, when they had earnings growth of
9.2%.
It is perhaps too early to draw firm conclusions about the second
quarter reporting season, but the early going does not appear very
inspiring. And it's not just the growth numbers that don't look
that impressive -- the tone of management guidance is also much
more downbeat. On the earnings calls and pre-announcements, we are
starting to hear a lot more about global growth uncertainties than
was the case last quarter. For instance, earnings results from
FedEx
(
FDX
) and
Nike
(
NKE
) and pre-announcements from
Procter & Gamble
(
PG
),
Ford
(
F
) and others are all pointing to these global growth questions that
have been swirling around for awhile now.
It would make sense for the earnings picture to deteriorate given
the tough macro backdrop that companies have to navigate. There is
hardly any place in the world at present that can be described as
in good economic shape. Europe is in recession; China, India and
Brazil are slowing down; and the outlook for the U.S. economy does
not look that favorable either. The combination of these macro
headwinds is showing up in earnings forecasts, which are continuing
to come down.
Total earnings are expected to increase 0.6% in the second quarter
from the same period last year, a growth rate that is down from
2.3% at the end of May and almost 5% in mid-April. Total earnings
are expected to be up 8.9% in 2012 and 10.7% in 2013.
The 0.6% growth expected for the second quarter reflects 0.3% lower
revenues and an 8 basis point expansion in net margins. Finance is
the primary growth driver in the second quarter, despite the
earnings hit at
J.P. Morgan
(
JPM
) due to the trading loss. Excluding Finance, second quarter
earnings growth will be down 5% from the same period last year.
Finance is also a major contributor to the full-year earnings
growth.
Seven of the sixteen Zacks sectors are expected to have negative
year-over-year earnings growth comparisons in the second quarter,
while only five sectors had negative earnings growth in the first
quarter. Earnings growth at Staples, Discretionary, and Aerospace
turn negative in the second quarter.
Earnings in the Tech sector are expected to decelerate sharply from
the persistent quarterly trend of double-digit growth rates and
increase by only 2% in the second quarter. This compares to growth
of 13.6% in the first quarter. Excluding
Apple
(
AAPL
), Tech earnings are expected to be down 4.2% in the second
quarter.
Keep in mind that Apple will single-handedly account for 21.5% of
all Tech sector earnings in the second quarter, while Apple's
earnings will be 4.1% of the entire S&P 500 earnings in the
quarter. For the full year 2012, Apple's earnings account for 23.2%
of all Tech sector earnings and 4.5% of S&P 500 earnings. In
terms of market cap, however, the tech giant accounts for 4.3% of
the index's market cap, bigger than 9 of the 16 Zacks sectors.
|
Growth Expected - Total Net Income
|
|
Zacks Sectors
|
"2Q-12E YoY"
|
"2Q-12E QoQ"
|
"1Q-12A YoY "
|
1Q-12A QoQ
|
"4Q-11A YoY "
|
"2011A YoY"
|
"2012E YoY"
|
"2013E YoY"
|
| Consumer Staples |
-6.7% |
7.6% |
3.6% |
-10.1% |
4.6% |
9.2% |
3.6% |
8.2% |
| Consumer Discretionary |
-0.3% |
3.5% |
6.7% |
-23.9% |
16.1% |
20.1% |
12.2% |
13.7% |
| Retail/Wholesale |
2.3% |
6.0% |
8.6% |
-13.6% |
-0.3% |
11.3% |
12.6% |
11.5% |
| Medical |
-3.2% |
-2.5% |
-0.3% |
6.5% |
1.2% |
8.0% |
2.2% |
5.9% |
| Auto |
-31.0% |
-8.1% |
-19.3% |
38.4% |
-7.3% |
6.8% |
4.8% |
10.0% |
| Basic Materials |
-17.2% |
3.3% |
-10.1% |
60.8% |
-12.4% |
30.5% |
-0.9% |
19.6% |
| Industrial Products |
14.3% |
8.2% |
12.8% |
13.2% |
16.9% |
37.3% |
14.7% |
11.2% |
| Construction |
25.1% |
74.2% |
128.1% |
-25.3% |
63.3% |
-4.6% |
53.7% |
27.9% |
| Conglomerates |
6.3% |
-0.5% |
19.7% |
0.4% |
-75.2% |
7.0% |
17.2% |
11.7% |
| Computer and Tech |
2.0% |
-4.7% |
13.6% |
-10.8% |
30.0% |
22.8% |
13.7% |
13.7% |
| Aerospace |
-8.9% |
-5.4% |
13.6% |
-14.5% |
10.5% |
11.5% |
-2.6% |
5.7% |
| Oils and Energy |
-17.2% |
-2.1% |
-3.1% |
5.0% |
4.0% |
35.9% |
-3.4% |
7.5% |
| Finance |
38.1% |
-18.8% |
19.9% |
35.9% |
25.3% |
4.3% |
24.9% |
10.8% |
| Utilities |
-11.1% |
-7.0% |
-6.1% |
29.2% |
-0.6% |
4.3% |
-6.5% |
9.0% |
| Transportation |
10.6% |
22.1% |
23.5% |
-14.7% |
16.2% |
-2.8% |
17.4% |
14.0% |
| Business Services |
12.5% |
7.7% |
14.7% |
-6.3% |
12.4% |
19.7% |
12.9% |
12.9% |
| S&P 500 |
0.6% |
-4.3% |
7.9% |
4.3% |
8.6% |
15.2% |
8.9% |
10.7% |
|
Growth Expected - Total Revenue
|
|
Zacks Sectors
|
"2Q-12E YoY"
|
"2Q-12E QoQ"
|
"1Q-12A YoY "
|
1Q-12A QoQ
|
"4Q-11A YoY "
|
"2011A YoY"
|
"2012E YoY"
|
"2013E YoY"
|
| Consumer Staples |
-9.5% |
-1.6% |
2.9% |
-9.2% |
4.4% |
7.4% |
-6.1% |
4.9% |
| Consumer Discretionary |
3.0% |
1.0% |
8.6% |
-8.0% |
10.9% |
12.3% |
5.6% |
5.8% |
| Retail/Wholesale |
5.4% |
3.4% |
5.1% |
-8.0% |
7.5% |
6.6% |
6.7% |
4.8% |
| Medical |
9.3% |
7.4% |
4.6% |
0.2% |
4.4% |
5.5% |
8.4% |
5.3% |
| Auto |
-0.9% |
2.7% |
4.1% |
-3.3% |
11.3% |
18.3% |
0.9% |
6.8% |
| Basic Materials |
0.1% |
4.5% |
5.3% |
4.7% |
7.7% |
18.2% |
5.8% |
6.5% |
| Industrial Products |
10.0% |
6.2% |
10.9% |
4.3% |
12.9% |
19.9% |
8.7% |
7.6% |
| Construction |
11.5% |
11.8% |
17.0% |
-2.6% |
11.7% |
4.2% |
12.4% |
11.0% |
| Conglomerates |
5.4% |
6.2% |
0.3% |
-4.4% |
-2.0% |
3.7% |
6.4% |
6.7% |
| Computer and Tech |
5.3% |
0.4% |
9.9% |
-5.9% |
11.0% |
13.7% |
7.8% |
9.7% |
| Aerospace |
3.8% |
1.0% |
8.3% |
-6.3% |
0.8% |
-1.1% |
3.6% |
2.7% |
| Oils and Energy |
-14.4% |
-11.6% |
4.5% |
-0.1% |
13.8% |
22.0% |
4.8% |
-1.6% |
| Finance |
-3.4% |
-8.2% |
1.8% |
7.8% |
-10.2% |
-3.1% |
-2.6% |
-5.1% |
| Utilities |
5.2% |
2.2% |
-0.4% |
0.5% |
4.2% |
3.3% |
4.6% |
3.4% |
| Transportation |
5.1% |
6.3% |
8.7% |
-2.8% |
10.6% |
12.6% |
6.9% |
8.5% |
| Business Services |
4.1% |
2.4% |
6.9% |
-3.2% |
7.4% |
9.2% |
4.4% |
5.6% |
| S&P 500 |
-0.3% |
-1.0% |
4.7% |
-2.3% |
5.6% |
9.0% |
4.3% |
3.4% |
Margins Have Peaked Already
The 0.6% earnings growth in the second quarter reflects a 0.3% drop
in revenue and an 8 basis-point expansion in margins. Nine of the
sixteen Zacks sectors will have negative year over year margin
comparisons, while ten sectors will see margins decline relative to
the previous quarter.
The very modest year over year margin gain is primarily due to
Finance. Excluding Finance, the margins picture turns negative,
both sequentially as well as year over year. Second quarter
margins, excluding Finance, are expected to be down 47 basis points
year over year and 6 basis points sequentially. For the full year
2012, margins are expected to be up 39 basis points, with Finance
as the biggest driver. Excluding finance, full year 2012 margins
will be flat from the 2011 level.
|
The Margins Story
|
|
Zacks Sectors
|
2Q-12E
|
1Q-12A
|
4Q-11A
|
3Q-11A
|
"2Q-11A "
|
2011A
|
2012E
|
2013E
|
| Consumer Staples |
11.7% |
10.7% |
10.7% |
11.5% |
11.3% |
10.5% |
11.5% |
11.9% |
| Consumer Discretionary |
9.0% |
9.5% |
10.6% |
9.3% |
9.3% |
8.9% |
9.5% |
10.2% |
| Retail/Wholesale |
3.6% |
3.5% |
4.0% |
3.4% |
3.7% |
3.4% |
3.6% |
3.8% |
| Medical |
12.9% |
14.2% |
13.4% |
14.7% |
14.6% |
14.0% |
13.2% |
13.3% |
| Auto |
4.6% |
5.2% |
3.6% |
5.8% |
6.6% |
4.7% |
4.9% |
5.1% |
| Basic Materials |
7.3% |
7.4% |
5.4% |
7.7% |
8.8% |
7.8% |
7.3% |
8.2% |
| Industrial Products |
9.0% |
8.8% |
8.2% |
8.8% |
8.7% |
8.4% |
8.9% |
9.1% |
| Construction |
3.5% |
2.3% |
2.9% |
3.5% |
3.2% |
2.7% |
3.6% |
4.2% |
| Conglomerates |
10.2% |
10.8% |
10.2% |
10.4% |
10.1% |
9.3% |
10.3% |
10.8% |
| Computer and Tech |
16.1% |
17.0% |
18.1% |
16.3% |
16.7% |
16.3% |
17.2% |
17.8% |
| Aerospace |
6.0% |
6.4% |
7.1% |
7.0% |
6.9% |
6.6% |
6.2% |
6.3% |
| Oils and Energy |
8.3% |
7.5% |
7.1% |
8.7% |
8.5% |
7.9% |
7.3% |
8.0% |
| Finance |
13.0% |
14.7% |
11.6% |
11.2% |
9.1% |
10.8% |
13.9% |
16.2% |
| Utilities |
7.0% |
7.7% |
6.0% |
9.8% |
8.2% |
8.2% |
7.4% |
7.8% |
| Transportation |
9.9% |
8.6% |
10.0% |
9.8% |
9.4% |
7.9% |
8.7% |
9.1% |
| Business Services |
13.1% |
12.5% |
13.1% |
12.5% |
12.1% |
11.8% |
12.7% |
13.6% |
| S&P 500 |
9.4% |
9.7% |
9.1% |
9.6% |
9.3% |
8.9% |
9.3% |
10.0% |
| Ex-Financials |
8.8% |
8.9% |
8.7% |
9.3% |
9.3% |
8.7% |
8.7% |
9.2% |
Trends in Estimate Revisions
This 'Estimate Revisions' portion of the write-up is still a work
in progress at this stage and will likely take some time to reach
its final shape. The idea is to give you a real-time insight into
trends in earnings estimate revisions, which has a direct bearing
on the stock market's movement.
The table below provides two measures -- the percentage change in
earnings estimates for 2012 over the last four weeks and a version
of the Revisions Ratio. This version of the 'Revisions Ratio' is
basically a ratio of the number of positive revisions to the total
number of revisions. The aggregate for the index has been weighted
by the respective earnings share of each sector. The intuition for
the ratio is fairly simple, as a reading above 0.5 means that more
than half of all estimate revisions are positive, while a reading
below 0.5 has the opposite meaning. As you can see, the measure is
at its lowest level in months at present.
Again, we plan to beef up this section in the coming days by
providing a more detailed and granular view of estimate revision
trends in real time. Feel free to provide suggestions in the
comments box at the end of the article.
|
% Change Last 4 Weeks / Revisions Ratio
|
|
Zacks Sectors
|
% Change as of Today
|
18-Jun
|
31-May
|
24-Apr "
|
"
3/30/2012 "
|
"
Rev Ratio as of Today
|
18-Jun
|
31-May
|
24-Apr
|
30-Mar
|
| Consumer Staples |
-0.44 |
-0.23 |
-0.15 |
-0.37 |
1.37 |
0.19 |
0.34 |
0.53 |
0.48 |
0.39 |
| Consumer Discretionary |
0.50 |
-0.35 |
-0.13 |
0.12 |
-1.45 |
0.55 |
0.38 |
0.6 |
0.72 |
0.37 |
| Retail/Wholesale |
-0.07 |
-0.39 |
1.15 |
0.67 |
0.11 |
0.3 |
0.41 |
0.54 |
0.84 |
0.71 |
| Medical |
-0.55 |
-0.06 |
0.14 |
-0.17 |
0.07 |
0.33 |
0.41 |
0.49 |
0.67 |
0.59 |
| Auto |
-1.84 |
-0.43 |
0.51 |
0.09 |
0.13 |
0.03 |
0.21 |
0.7 |
0.65 |
0.71 |
| Basic Materials |
-3.57 |
-1 |
-0.07 |
-0.96 |
-1.39 |
0.14 |
0.39 |
0.53 |
0.5 |
0.33 |
| Industrial Products |
-1.15 |
-0.73 |
-0.33 |
0.44 |
0.11 |
0.06 |
0.42 |
0.45 |
0.75 |
0.74 |
| Construction |
14.73 |
0.5 |
3.53 |
2.68 |
1.18 |
0.73 |
0.67 |
0.57 |
0.94 |
0.89 |
| Conglomerates |
17.93 |
-2.2 |
0.04 |
0.35 |
-0.04 |
0.04 |
0.55 |
0.67 |
0.88 |
0.46 |
| Computer and Tech |
-2.54 |
-1.65 |
-0.92 |
1.29 |
-0.52 |
0.25 |
0.4 |
0.53 |
0.67 |
0.52 |
| Aerospace |
-0.31 |
-0.06 |
-0.05 |
0.03 |
0.08 |
0.23 |
0.4 |
0.55 |
0.47 |
0.33 |
| Oils and Energy |
-3.12 |
4.62 |
-7.83 |
-5.44 |
-11.4 |
0.14 |
0.25 |
0.32 |
0.35 |
0.39 |
| Finance |
-1.95 |
-0.51 |
-0.21 |
1.13 |
0.32 |
0.29 |
0.28 |
0.47 |
0.71 |
0.65 |
| Utilities |
-0.29 |
-0.47 |
-1.06 |
-0.76 |
-0.51 |
0.32 |
0.47 |
0.36 |
0.24 |
0.3 |
| Transportation |
-0.10 |
0.86 |
-0.2 |
-0.46 |
-1.85 |
0.32 |
0.57 |
0.37 |
0.45 |
0.3 |
| Business Services |
-0.30 |
-0.29 |
0.04 |
0.11 |
-0.03 |
0.12 |
0.27 |
0.79 |
0.67 |
0.64 |
| S&P 500 |
-0.60 |
-0.17 |
-0.72 |
-0.08 " |
"
-1.03 " |
"
0.25 |
0.37 |
0.49 |
0.61 |
0.52 |
Market Cap vs. Total Earnings
The charts below show the share of total earnings for 2012 as well
as the share of total market capitalization for each of the 16
Zacks sectors. Since the S&P 500 is a market-cap weighted
index, each sector's market cap share is also its index weight. As
mentioned earlier, Apple will contribute more to the total S&P
500 earnings this year than nine of the sixteen Zacks sectors.
Finance is steadily regaining its prominent position in the index
in terms of earnings contribution, though it still remains
significantly below its record 27% share of the index earnings in
2007.
|
S&P Income & Market Cap by Sector
|
|
Sales Growth
|
2012 Income
|
Market Cap
|
| Consumer Staples |
7.2% |
9% |
| Consumer Discretionary |
3.4% |
4% |
| Retail/Wholesale |
7.3% |
10% |
| Medical |
11.0% |
11% |
| Auto |
1.3% |
1% |
| Basic Materials |
3.2% |
3% |
| Industrial Products |
2.7% |
2% |
| Construction |
0.3% |
1% |
| Conglomerates |
3.5% |
4% |
| Computer and Tech |
19.3% |
19% |
| Aerospace |
1.5% |
1% |
| Oils and Energy |
13.1% |
10% |
| Finance |
17.7% |
14% |
| Utilities |
4.9% |
7% |
|
Transportation |
1.6% |
2% |
| Business
Services |
1.9% |
3% |
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