The following excerpt is from this week's Earnings
Trends. To see the full report, please
Into the Heart of Q3 Earnings Season
The 2013 Q3 earnings season started off decidedly on the weak
side, with earnings and revenue growth rates tracking lower than
the last few quarters and companies struggling to beat
expectations that had come down significantly during the quarter.
But as more companies have reported, the picture has started to
improve a bit, with the Q3 earnings season now looking more like
what we saw in Q2 and the preceding few quarters.
Total earnings for the 212 S&P 500 companies that have
reported results already, as of Thursday morning October 24th,
are up +8.1% from the same period last year, with 67.9% beating
earnings expectations with a median surprise of +2.5%. Total
revenues for these companies are up +3%, with 42% beating revenue
expectations with a median surprise that is barely in the
The charts below show how the results from these 212 companies
compare to what these same companies reported in Q2 and the
average for the last 4 quarters. The earnings and revenue growth
rates which looked materially weaker in the earlier phase of the
Q3 reporting cycle have improved.
The earnings beat ratio looks more normal now than was the case
last Friday when only 62.6% of the 99 companies that had reported
by then were beating expectations. It didn't make much sense for
companies to be struggling to beat earnings expectations
following the significant estimate cuts in the run up to the
The current above average earnings beat ratio for the 212 S&P
500 companies that have reported already confirms what many of us
were suspecting all along - that estimates had fallen enough to
make it easy for companies to come ahead of them. We see this
quarter after quarter, with about two-thirds of the companies
beating earnings expectations - a good illustration of management
teams' tendency to under-promise and over-deliver.
The composite earnings growth rate for Q3, combining the results
from the 212 that have come out with the 288 still to come,
currently remains at +2.9% on +1.2 higher revenues. It is perhaps
reasonable to expect that the final Q3 earnings growth tally will
likely be not much different from the +3.4% achieved in Q2.
We may not have had much growth in recent quarters, but the
expectation is for strong growth resumption in Q4 and beyond.
Estimates for Q4 have started coming down, with the current +9.1%
growth pace down from last week's +9.5%. But as the chart below
shows, consensus estimates for Q4 and beyond represent a material
acceleration in earnings growth.
Guidance has been overwhelmingly negative over the last few
quarters and is not much different thus far in Q3 either, a few
notable exceptions aside.
Dow Chemical's (
) comment that "the world continues to show hesitant growth at
best, particularly in the near term" spotlights the global growth
uncertainties. We saw this theme echoed in the report from
) as well, as it guided lower. The mining and construction giant
noted that "there are encouraging signs, but there is also a
great deal of uncertainty worldwide as we look ahead to 2014".
Comments from IBM (
), Intel (
), and Yum Brands (
) earlier in the reporting cycle were to the same effect.
Not all management commentary is negative, with a handful of
companies, notably Ford (
) and Boeing (
), standing out for positive guidance. Ford appeared particularly
positive and confident in its outlook, particularly in its
ability to turnaround its still-in-loss European operations. But
these positive and upbeat comments are drowned out by the broadly
negative or tentative guidance from a majority of the companies.
Given this backdrop, estimates for Q4 will most likely come down
quite a bit in the coming weeks. And with the market expecting
the Fed to wait till early next year to start Tapering its QE
program, investors may shrug this coming period of negative
estimate revisions, just like they have been doing for more than
a year now.
- We are in the thick of the 2013 Q3 earnings season, with
results from 212 S&P 500 companies accounting for 47% of
the index's total market capitalization, already out. Total
earnings for these 212 companies are up +8.1%, with 67.9%
beating earnings expectations. Revenues for these companies are
up +3.0%, with a revenue 'beat ratio' of 42.0%.
- Unlike Q2, the Finance sector has been less of a growth
driver in Q3, with total earnings for the 60.1% of the sector's
total market capitalization that have reported already, up
+13.0%. The sector's growth momentum has decelerated from the
last few quarters and industry leaders like J.P. Morgan (
) and Goldman Sachs (
) have disappointed. Excluding Finance, total earnings for the
S&P 500 that have been reported would be up +6.4% vs. +1.2%
for the same companies in Q2.
- Technology spotlights the ex-Finance variance from Q2, with
total earnings for the 45.7% of the sector's total market
capitalization that have reported up +9.6% on +2.0% higher
revenues. Strong growth rates at Google (
) and Sandisk (
) and Micron (
) have helped the sector reverse the negative earnings growth
trend of the last few quarters.
- The +9.6% earnings growth for the 32 Tech companies that
have reported compare to -2% earnings decline in Q2 and the
4-quarter average of -0.5%.
- Total Q3 earnings for all S&P 500 companies, combing
the 212 that have reported with the 288 still to come, are
expected to be up +2.9%, which reflects +1.2% revenue growth
and modest gains in margins. This compares to +3.4% earnings
growth in Q2.
- Guidance has been overwhelmingly negative over the last few
quarters and the trend from the initial Q3 reports isn't much
different. The quality and tone of company guidance will be key
to where estimates for Q4 settle down, which currently remain
- While there is not much growth, the overall level of total
earnings is quite high, with total earnings in Q3 not a lot
lower from Q2's all-time quarterly record. Earnings for the
S&P 500 companies are expected to total $257.0 billion in
Q3, down from Q2's record of $260.3 billion.
To see the Full Earnings Trends PDF, please
CATERPILLAR INC (CAT): Free Stock Analysis
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FORD MOTOR CO (F): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis
INTEL CORP (INTC): Free Stock Analysis Report
YUM! BRANDS INC (YUM): Free Stock Analysis
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