The following is an excerpt from this week's Earnings Trends
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Earnings Guidance Remains Weak
Our overall verdict on the Q4 earnings season is that it is no
better or worse than what we have been seeing in the last few
quarters. In some respects, the Q4 earnings season is an
improvement over the recent past. Specifically, total earnings
for the S&P 500 are on track to reach a new all-time
quarterly record and even earnings growth for the quarter is in
on track to be the highest of the year (even after accounting for
easy comparisons). Positive surprises started off on the weak
side, but even those are running at the best pace of the year.
Revenue growth has been a challenge for companies for quite some
time and we don't see any improvement on that front in Q4 either.
If anything, the aggregate revenue growth rate at this stage is
even weaker than what we have been seeing in recent quarters,
though the bulk of the revenue weakness is due the Finance and
The most notable thing that hasn't changed at all from other
recent quarters is guidance - it was weak before and it's still
weak, as the guidance from
Deere & Company
), just to name a few, shows. Part of the guidance weakness is
likely a function of management's need for expectations
management. The need for conservatism aside, one has to be
extremely cynical to believe that management teams would guide
lower while knowing that their business outlook was stable, if
not improving. The chart below shows how estimates for the
current quarter have fallen in response to weak company
With the Retail sector heavily represented in the still-to-come
reports, it is reasonable to expect that estimates still have
room to go down.
Companies have been guiding lower quarter after quarter,
prompting earnings estimates to keep coming down for almost two
years. The market didn't care much about this, with an ever
helpful Fed not letting earnings-related worries coming in the
way of the market's upward thrust. But the Fed has started
getting out of the QE business just as these other issues have
taken center stage.
The popular narrative connects the Fed Taper with what is
happening in the emerging markets. The Fed doesn't appear in any
mood, for obvious reasons, to adjust its Taper plans to
accommodate the emerging economies. In fact, it is reasonable to
assume that they don't mind the safe-haven trade keeping bond
yields in check.
The 2013 Q4 Scorecard
With respect to the Scorecard for 2013 Q4, we have seen results
from 430 S&P 500 members accounting for 91.3% of the index's
total market capitalization. Total earnings for these companies
are up +10.4% from the same period last year, with 68.6% beating
earnings expectations with a median surprise of +2.4%. Total
revenues for these companies are barely in the positive, up only
+0.8%, with 59.8% beating revenue expectations with a median
surprise of 0.7%.
The +10.4% 'headline' total earnings growth rate definitely looks
fairly robust, particularly when compared to the growth rate for
this same group of 430 companies in the last few quarters. Easy
comparisons for three companies -
Bank of America
) - account for a big part of the strong Q4 earnings growth.
Exclude these three and total earnings growth for the S&P 500
companies that have reported drops by almost half. Performance on
the revenue front is notably sub-par relative to recent quarters,
dragged down by weakness in the Finance and Energy sectors.
The composite picture for Q4 - combining the results for the 430
companies that have reported already with the 70 still to come -
is for earnings growth of +9.1%. This will be the highest
quarterly growth pace of 2013, with easy comparisons playing a
non-trivial role propping up the growth rate. But it's not all
easy comparisons, as total earnings for the index are on track to
reach a new all-time quarterly record.
Trends on the estimate revision front have been negative for a
while, but we could afford to overlook such details in the
Fed-inspired rally. It will be interesting to see if investors
will continue to shrug estimate cuts in the post-QE world.
- Total earnings for the 430 S&P 500 companies that have
reported results are up +10.4%, with 68.6% beating earnings
expectations. Revenues for these companies are up +0.8%, with a
revenue 'beat ratio' of 59.8%.
- Easy comparisons for Bank of America, Verizon and Travelers
account for most of the growth thus far. Excluding these three
companies, the earnings growth rate drops to +6.4%, which is
comparable to what this same group of companies have achieved
in recent quarters.
- Revenue growth at this stage is lower than what we have
seen from this same group of companies in Q3 and other recent
quarters, dragged down by weak top-line growth numbers from the
Energy and Finance sectors. Excluding these two sectors, the
revenue growth picture is still weak, but not so starkly.
- Total earnings in Q4 are on track to reach a new all-time
quarterly record, surpassing the record reached just the
- Easy comparisons, particularly for the Finance sector,
account for a big part of the Q4 growth. Total earnings for the
Finance sector are expected to be up +23.2%. Excluding Finance,
total earnings growth for the S&P 500 drops to +6.3%.
- Guidance has overwhelmingly been negative in recent
quarters and the trend has largely remained in place in the Q4
reporting season as well. As a result, estimates for 2014 Q1
and beyond have been coming down as the earnings season has
- The bottom-up 'EPS' estimate for the S&P 500 for 2014
currently stands at $117.16, while the top-down estimate for
the same is currently at $117.25. For 2015, the bottom-up
estimate remains $130.24.
To see the full Earnings Trends PDF,
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BOEING CO (BA): Free Stock Analysis Report
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DEERE & CO (DE): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis
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