The following is an excerpt from this week's Earnings Trends
article. To see the full report,
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Taking Stock of the Q1 Earnings Season
The 2014 Q1 earnings season takes center stage from next week
onwards even though the reporting cycle has actually been
underway for a couple of weeks. The reports thus far (19 S&P
500 companies have reported results) are from companies with
fiscal quarters ending in February, which we count as part of the
Q1 tally. Results for companies with March ending quarter will
start next week with
) release on April 8th.
Many of these early February quarter-ending companies aren't
obscure players as the list includes industry leaders like
), and others. These initial reports don't inspire much
confidence and appear to be pointing towards another
underwhelming reporting season ahead. But it's perhaps premature
to draw any firm conclusions based on such an unrepresentative
sample of reports.
The chart below shows weekly schedule for how Q1 results will
Expectations for the Q1 earnings season as whole remain low, with
total earnings expected to be down -2.6% from the same period
last year on +1.0% higher revenues and modestly lower margins. As
has been the trend for more than a year now, estimates for Q1
came down sharply as the quarter unfolded. The current -2.6%
decline in total earnings in Q1 is down from +2.1% growth
expected at the start of the quarter in January.
Current estimates for total S&P 500 earnings in Q1 are down
-2.9% from what was expected at the start of the quarter in early
January. This magnitude of negative revision to Q1 earnings over
the last three months is greater than what we witnessed in the
comparable period in 2013 Q4, but is broadly in-line with the
magnitude of the 4-quarter average of negative revision.
The chart below shows the magnitude of negative earnings revision
for 2014 Q1 and each of the preceding four quarters over the
course of each quarter.
Estimates for Q1 have fallen across the board, but the trend is
particularly notable for the Retail, Basic Materials, Autos,
Consumer Staples, and the Energy sectors, as the chart below
With two-thirds of S&P 500 members typically beating earnings
estimates in any reporting cycle, actual Q1 results will almost
certainly be better than these pre-season expectations. But Q1 is
unlikely to repeat the performance of the last few quarters when
we would witness new all-time records for total earnings each
Guidance has been overwhelmingly weak for more than a year now,
keeping the revisions trend firmly in the negative direction.
Odds are that we wouldn't see any change on that front this
earnings season either, bringing down estimates for the rest of
the year. Investors haven't cared about negative estimate
revisions thus far, but it will be interesting that behavior will
remain in place going forward as well.
- The 2014 Q1 earnings season has gotten underway with
results from 19 S&P 500 members (with fiscal quarters
ending in February) already out. The reporting cycle gets into
high gear from next week onwards.
- Total earnings for the 19 S&P 500 companies that have
reported results are up +0.5%, with 57.9% beating earnings
expectations. Revenues for these companies are up +4.3%, with a
revenue 'beat ratio' of 47.4%. The performance from these
companies is weaker than what we have seen from this same group
of companies in recent quarters.
- For the S&P 500 companies as whole, total Q1 earnings
are expected to be down -2.6% from the same period last year,
on +1% higher revenues and 35 basis points in lower margins.
Sequentially, total earnings for the S&P 500 are expected
to be down -6.3%.
- Estimates fell sharply as the quarter unfolded, with the
current -2.6% decline in total earnings down from expectations
of +2.1% positive growth in early January.
- The growth weakness is broad-based and not concentrated in
any one sector, with 10 of the 16 Zacks sectors expected to
show earnings declines in Q1. Among the major sectors, earnings
are expected at this stage to be down -3.9% in Finance, -4.2%
in Technology, -6.9% in Energy, and -13.5% in Autos. Business
Services and Utilities are the only sectors expected to show
double-digit earnings growth.
- The Q1 earnings season is expected to be the low point of
this year's earnings picture, both in terms of total earnings
as well as the growth rate. Total quarterly earnings reached an
all-time record in 2013 Q4, but are expected to fall short of
that level in 2014 Q1. Expectations for the coming quarters
reflect a strong ramp up, with each of the following three
quarters a new all-time record.
- Guidance has overwhelmingly been negative in recent
quarters and we saw the same trend in place with the initial Q1
reports. Continuation of that trend through the rest of this
earnings season will result in the by-now all-too-familiar
negative revisions to estimates for 2014 Q2.
- Total earnings in Q2 are currently expected to be up +5.4%,
followed by growth rates of +7.2% in Q3 and +9.4% in Q4. For
the full year, total earnings are expected to be up +7.8% in
2014 and +11.7% in 2015.
- The bottom-up 'EPS' estimate for the S&P 500 for 2014
currently stands at $116.60, while the top-down estimate for
the same is currently at $117.25. For 2015, the bottom-up
estimate remains $130.19.
To see the full Earnings Trends report,
please click here
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