We are entering the heart of the Q4 earnings season, with more than 100 S&P 500 members coming out with results this week.
Picture Emerging Thus Far
We now have Q4 results from 63 S&P 500 members that combined account for 19% of the index's total market capitalization. According to the latest Earnings Preview , total earnings for these companies are up 4.7% from the same period last year on 2.7% higher revenues, with 66.7% positive earnings surprises and 50.8% beating revenue estimates.
Energy: A Bad Start but Predictions Look Positive
As of now, the 'Energy' sector has been a big drag on the aggregate growth picture. However, things are likely to improve with the segment eventually expected to clock its first positive earnings growth after eight quarters of decline.
For the few sector components on the S&P 500 index that have reported Q4 results, total earnings are down 42.8% on 7.8% lower revenues. Interestingly, while 50% of the companies have been successful in beating earnings estimates, all of them have outperformed the top line.
Oilfield Service Companies in Early Focus
As is the norm, oil services companies - providers of technical products and services to drillers of oil and gas wells - have kicked off what is expected to be a relatively good earnings season for U.S. energy firms.
With the U.S. rig count falling to record levels last year, oilfield services players were hit hard. Unprecedented declines in activity levels and a sharp fall in upstream spending resulted in lower revenues and pricing headwinds.
However, with commodity prices steadily improving and drilling activities picking up, the market for services companies is on the mend. Though we are still not anywhere near the activity highs seen in 2014, spending on exploration projects have experienced a much-awaited rebound. Energy explorers, buoyed by the jump in commodity prices, are set for an improvement in sales and earnings - a part of which is likely to be generated by the long-struggling oilfield service providers.
We also appreciate the oil service players' cost-cutting initiatives (like reduced headcount, consolidating facilities) amid weak oil prices over a length of time. Most of them have successfully implemented their plans of pruning annual costs, while using the challenges prevailing in the industry to their advantage, mainly by offering low cost solutions that aid producers to churn out more by investing less.
On the flip side, fourth-quarter activity is likely to be weak due to holiday and seasonal weather-associated disruptions. Moreover, pricing pressure is expected to continue over the near term with oil service companies dishing out some big concessions to producers in recent years.
Add to this project delays and job cancellations, which are likely to translate into margin contraction.
Therefore, notwithstanding the nice bump in oil prices, it will take some time for service providers to translate it into earnings gain. This was evident from the quarterly release of Schlumberger Ltd. SLB , wherein Q4 results failed to impress on Friday . On the other hand, smaller rival Halliburton Co. HAL came up with better-than-expected Q4 profit on continued cost management actions and improving North American activity .
Stocks to Watch for Earnings on Jan 25
Let's see what's in store for three such companies expected to come up with fourth-quarter numbers on Wednesday, Jan 25.
An oilfield services company that provides reservoir management and production enhancement services to the global oil and gas industry, Core Laboratories N.V.CLB , is expected to report after the closing bell.
In the third quarter of 2016, this Amsterdam, the Netherlands-headquartered provider of specialized, patented technologies just about managed to meet estimates, as results were bogged down by reduced drilling activity levels, primarily in North America.
However, an earnings beat seems much more likely for Core Laboratories this time around, given its combination of a Zacks Rank #2 (Buy) and Earnings ESP of +4.88%.
As per our proven model, a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) to beat on earnings. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
Simultaneously, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions. (Read more: Core Laboratories Q4 Earnings: Is a Beat in Store? )
Core Laboratories N.V. Price and EPS Surprise
Headquartered in Atlanta, GA, RPC Inc.RES is also set to report before the opening bell. The company provides a broad range of specialized services - including pressure pumping and coiled tubing - to independent oil and gas explorers throughout the U.S. Coming to the earnings surprise history, RPC has a good track. It beat estimates in three of the last four quarters at an average rate of 9.40%.
But we do not expect RPC to beat earnings expectations in the fourth quarter as our proven model shows that it does not have the right combination of the two key components. While a Zacks Rank #1 increases the predictive power of ESP, the company's ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today's Zacks #1 Rank stocks here .
RPC, Inc. Price and EPS Surprise
Finally, we have Houston, TX-based Flotek Industries Inc.FTK . Coming to its earnings surprise history, the company - which provides a range of products and services to enhance returns for the oil and gas finders - has a dismal track of having missed estimates in three of the last four quarters.
With an Earnings ESP of 0.00% and Zacks Rank #4, our proven model shows that an earnings beat is uncertain for Flotek this time too.
Flotek Industries, Inc. Price and EPS Surprise
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