The following is an excerpt from this week's Earnings Trends article. To see the whole article, please click here .
It isn't news anymore that the earnings picture emerging from the Q1 earnings season has been very bad - there is not much growth, with revenue gains particularly hard to come by and many companies unable to meet even the lowered top-line estimates. The outlook is no better for the current period either, with Q2 estimates following the by-now familiar downtrend that we have been seeing for the last many quarters.
While there is no question about the overall soft earnings landscape, but is the underperformance widespread and present in all sectors or do some pockets of strength exist? The answer to that is yes, some sectors have done better. But the better performance is relative - relative to pre-season expectations and relative to the very weak performance of other sectors this earnings season.
I will spotlight three sectors here that have done reasonably better this earnings season - Retail, Medical and Energy. The reference to the Energy sector will likely surprise many given how much of a drag the sector has been on the aggregate growth picture. But the Energy sector's results have nevertheless been better than expected, with a bigger proportion of companies beating estimates and the growth rates aren't as bad as initially feared.
Is the Retail Turnaround for Real?
One could dispute putting the Energy sector results in a favorable light, but it's hard to characterize the Retail sector's performance thus far as anything but very good. Not only is a bigger proportion of retailers beating estimates compared to other sectors, but the sector's Q1 growth rates also represent an improvement over other recent reporting cycles. We should keep in mind, however, that while the Q1 earnings season is winding down for most of the other sectors, we are only about half-way through for the retailers.
For the 22 retailers in the S&P 500 index that have reported Q1 results (out of a total 44), total earnings are up +7.5% on +11.7% higher revenues, with 90.9% beating EPS estimates and 50% coming ahead of revenue estimates.
Please note that the sector's earnings beat ratio is the highest in the S&P 500 index, while the revenue beat ratio is the fourth highest. The side-by-side comparison charts below show how the sector's results are tracking notably better relative to other recent periods.
The sector's strong results notwithstanding, the double-digit revenue growth rate is a bit misleading as it reflects easy comparisons at Walgreen Boots ( WBA ) and the outsized gains at Amazon ( AMZN ). Take these two companies out of the results thus far and the sector's revenue growth rate drops to +6.7% - still reasonably good, but no longer the best in the S&P 500.
No doubt, the retail sector stock prices have risen the most of all the sectors in the index in response to earnings releases. The Retail sector's positive momentum in the Q1 earnings season could change in the coming days as more companies report results. But at this stage in the reporting cycle, it remains a standout performer.
Results have been fairly strong in the Medical sector as well, with total earnings for the 88.5% of the sector's companies that have reported results up +17.6% on +8.8% higher revenues, with 80.4% beating EPS estimates and 56.5% coming ahead of top-line expectations. Strong growth at Gilead Sciences ( GILD ) - Gilead's earnings are up +2.1 billion from the same period last year on $2.6 billion higher revenues - are a big contributor to the Medical sector's growth numbers. But the sector's earnings would still be up double-digits without Gilead.
Q1 Scorecard ( as of May 7th, 2015 )
We now have Q1 results from 436 S&P 500 members that combined account for 90.3% of the index's total market capitalization. Total earnings for these 436 companies are up +2.0% on -4.1% revenues, with 66.7% beating EPS estimates and only 42.7% coming ahead of top-line expectations. This is weak performance compared to what we have seen from the same group of 436 S&P 500 members in other recent periods. (Please note that we provide the scorecard for the Russell 2000 index on page 16 of the detailed report)
The two side-by-side charts below give a historical context to the results thus far - by comparing the Q1 earnings & revenue growth rates (left-hand side chart) and earnings & revenue beat ratios (right-hand side chart) with what these same companies achieved in the preceding quarter as well as the 4-quarter average.
Three things stand out as we look at the results thus far
First , the revenue weakness is very notable. We knew that growth will be problematic in Q1, so the weak revenue growth rate of -4.1% compared to other recent periods isn't that surprising. But the very low proportion of companies beating revenue estimates is surprising and likely indicative that the growth backdrop has been even weaker than what was reflected in consensus estimates.
Second , the earnings growth rate (+2.0%) is also weak relative to what we saw from the same group of companies in 2014 Q4 and the 4-quarter average. While the Finance sector has been a positive growth contributor, the Energy sector's impact has been in the opposite direction. Excluding contribution of these two sectors, the Q1 earnings growth still compares to unfavorably other recent periods, as the right hand-side chart below shows.
Third , as has been the norm in recent quarters, management teams continue to guide lower for the current and following quarters. As a result, estimates for the current quarter, which had fallen quite a bit already in solidarity with the Q1 estimate cuts, have started coming down even more. The chart below shows how earnings growth estimates for Q2 have evolved since the beginning of the year.
The dollar issue has added to the Energy sector's woes and some concerns about the U.S. economic picture in bringing down this year's estimates. Current consensus estimates show earnings growth for the S&P 500 to be in the negative for the first three quarters of the year, with the growth rate for the full-year now modestly in the negative. The expectation is that the growth picture starts improving in the last quarter of the year, with the growth pace ramping up to double-digit rates in 2016.
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